The Management of Hillsboro Industries Is Evaluating Whether the Company

question 110

Essay

The management of Hillsboro Industries is evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. Based upon their accounting records, it appears that it costs the company $80 per unit to make the component. The $80 cost per component was determined as follows: Hillsboro Industries uses 10,000 components per year. After Ricardo Inc. submitted a bid of $70 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component.
If the component is obtained from Ricardo Inc., $5 of fixed manufacturing overhead per unit would be avoided and Hillsboro's unused production facilities could be leased to another company for $30,000 per year.
Based upon relevant cost differences, should Hillsboro Industries make or buy the component? Include your supporting calculations.

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Definitions:

Mental Defect

An outdated and offensive term that was previously used to describe a range of intellectual disabilities or cognitive impairments.

American Law Institute (ALI)

An independent organization in the United States that produces scholarly work to clarify, modernize, and otherwise improve the law.

M'Naghten

Refers to the M'Naghten Rule, a legal standard for determining the insanity of a defendant, based on their ability to understand right from wrong at the time of the crime.