Question

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $35 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost $ 7 Unit-level labor cost $ 6 Unit-level overhead $ 5 Batch-level set-up cost (8,000 units per batch) $ 50,000 Product-level supervisory salaries $ 50,000 Allocated facility-level costs $ 45,000 The company expects an annual need for 8,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $4,000 a month. If the company decides to make the parts, total costs will be?

Answer 1

Answer:

Total costs will be $12,000 more than if the switches are purchased.

Explanation:

Total incremental cost:

= Unit cost + Batch level set up cost + Product level supervisory salaries + Rental income

= (material cost + labor cost + overhead) × Annual need for switches + $50,000 + $50,000 + ($4,000 × 12 months)

= (7 + 6 + 5) × 8,000 + $50,000 + $50,000 + ($4,000 × 12 months)

= $144,000 + $50,000 + $50,000 + $48,000

= $292,000

Present cost = Annual need for switches × cost of each switch

                     = 8,000 × $35

                     = $280,000

Net increase in costs will be:

= Total incremental cost - Present cost

=  $292,000 - $280,000

= $12,000

Therefore, the total costs will be $12,000 more than if the switches are purchased.