Answer:
If the company makes the component, $165,000 will be saved.
Explanation:
Giving the following information:
Units production= 55,000 units
Production costs:
Direct materials $5
Direct labor $9
Avoidable Overhead= 3
Direct materials and direct labor are 100% variable.
An outside supplier has offered to supply the 55,000 units of RX5 for $20.00 per unit.
We need to determine the total cost of making in-house and buying.
<u>We will take into account only the variable cost (avoidable cost).</u>
<u>Make in-house:</u>
Total cost= 55,000*(5 + 9 + 3)= $935,000
<u>Buy:</u>
Total cost= 55,000*20= $1,100,000
If the company makes the component, $165,000 will be saved.
