Marshall Company Currently Manufactures One of Its Parts at a Cost

question 16

Essay

Marshall Company currently manufactures one of its parts at a cost of $3.25 per unit. This cost is based on a normal production rate of 50,000 units. Variable costs are $2.10 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Marshall is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.

---

Definitions:

Third Party

An entity involved in a transaction or agreement who is not one of the principal parties.

Cooperative

An organization consisting of people who pool their resources to buy and sell more efficiently than they could individually.

Single-Owner

Pertains to a business that is exclusively owned by one individual who is responsible for its operations and liabilities.

Business Organization

An entity formed for the purpose of carrying out commercial enterprise, including options such as sole proprietorships, partnerships, and corporations.