Each Year,Madsen Company Purchases 8,000 Units of a Part That

question 44

Essay

Each year,Madsen Company purchases 8,000 units of a part that it needs for production of its product.The supplier notified Madsen Company that a price increase will take effect shortly,which will bring the price of the part to $25 per part.Madsen Company is considering the use of idle facilities to produce the part.The annual production costs to produce the needed 8,000 parts are as follows:
$\begin{array}{ll}\text { Direct materials } & \$ 17,500 \\\text { Direct labor } & 30,000 \\\text { Variable indirect production costs } & 14,000 \\\text { Fixed indirect production costs } & 33,500\end{array}$
The idle facilities could also be rented out at an annual rent of $99,000.All the fixed indirect production costs are avoidable.
Required:
Determine if Madsen Company should buy the part or produce it internally.

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Definitions:

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