Answer:
It is more profitable to make the units in-house.
Explanation:
Giving the following information:
Variable manufacturing costs per unit of X are as follows:
Direct materials $1
Direct labor $10
Variable manufacturing overhead $5
Total unitary variable cost= $16
Number of units= 10,000 units
Buying price= $22 per unit.
If Nelson accepts the offer, $50,000 of fixed manufacturing overhead will be eliminated.
We need to calculate the total cost of each option and choose the cheapest one:
Production:
Total cost= 10,000*16 + 50,000= $210,000
Buy:
Total cost= 10,000*22= $220,000
It is more profitable to make the units in-house.
