Make or Buy production decision making.

 

Assume that a division of Bose makes an electronic component for its speakers. Its manufacturingprocess for the component is a highly automated part of a just-in-time production system. All labor isconsidered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume.Production costs for 100,000 units of the component are as follows:Direct materials $300,000Factory overheadIndirect labor $80,000Supplies 30,000Allocated occupancy cost 40,000 150,000Total cost $450,000A small, local company has offered to supply the components at a price of $3.30 each. If the divisiondiscontinued its production of the component, it would save two-thirds of the supplies cost and$30,000 of indirect-labor cost. All other overhead costs would continue.The division manager recently attended a seminar on cost behavior and learned about fixed andvariable costs. He wants to continue to make the component because the variable cost of $3.00 isbelow the $3.30 bid.

1. Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative isless costly and by how much?

2. What qualitative factors might influence the decision about whether to make or to buy the component?