Andrea Company Manufactures a Part for Its Production Cycle Andrea Company Has Been Approached by a Supplier Who Will

question 57

Essay

Andrea Company manufactures a part for its production cycle.The annual costs per unit for 20,000 units of this part are as follows:
$\begin{array} { l } \text {Direct materials }&\$15 \\ \text { Direct labor}&12 \\ \text {Variable indirect production costs }&19 \\ \text {Fixed indirect production costs }&16 \\ \text {Total cost }&\$62 \\\end{array}$

Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for $940,000.All the fixed indirect production costs are unavoidable if Andrea Company ceases production of the part.
Required:
A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part?
B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy the part? If so, how much money will be saved?

• A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part?
• B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy the part? If so, how much money will be saved?

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Definitions:

Alternative Solutions

Different options or approaches to solving a problem or addressing a situation.

Intuition

The ability to understand or know something immediately based on feelings rather than facts or evidence.

Creativity

The capacity to generate unique and worthwhile concepts.

Alternative Solutions

Different methods or strategies considered to solve a problem or achieve a goal.