Larkin, Inc

question 143

Essay

Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows:
Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs.
A vendor has offered to supply the NJF1 component at a price of $175 per unit.
Instructions
(a) Should Larkin purchase the component from the outside vendor if its capacity remains idle?
(b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.

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Definitions:

Marginal Wage Cost

The additional cost incurred by hiring an extra unit of labor, essentially the change in total wage cost from hiring one more employee.

Monopsonistic Labor Market

A market situation in which there is only one buyer (employer) for many sellers (workers), allowing the buyer to exert considerable control over wages and employment conditions.

MRP

Marginal Revenue Product; the additional revenue generated by employing one more unit of a factor, such as labor or capital.

Marginal Revenue Product

The additional revenue a firm earns by employing one more unit of input, like labor or capital, in the production process.