Question

The Dober Corporation is considering discontinuing the manufacture of a part and instead, purchasing it from an external supplier. The external supplier has quoted a price of $35 per unit. The current annual production of this part is 65,000 units and is expected to remain constant. The costs of manufacturing the part are as follows:

Direct materials	$10
Direct labour – 1 hour @$15	15
Variable overhead – 1 hour @ $5	5
Fixed overhead – 1 hour @ $12	12
	$42

If the part is purchased from the external supplier, Dober will be able to increase the sales of one of its other products by 20,000 units. This other product currently sells for $40 and has variable costs of $25. In addition, the part line supervisor will be hired by the external supplier. The external supplier will therefore be responsible for paying the part line supervisor’s annual salary of $56,000.

Required

Determine if the part should be manufactured or purchased externally. Show all of your computations.

Answer 1