Each of the following situations is independent:
Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,500 units of product OP89 for $155,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:
Cost per Unit | |||
Direct materials | $ | 28 | |
Direct labor | 19 | ||
Variable overhead | 17 | ||
Allocated fixed overhead | 3 | ||
Required:
1. What is the relevant cost per unit to make the product internally?
2. What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?
What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?
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