Senior Company Currently Buys 30,000 Units of a Part Used

question 125

Essay

Senior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit.Recently the supplier informed Senior Company that a 20% increase will take effect next year.Senior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units):
If the units are purchased from the supplier,$200,000 of fixed costs will continue to be incurred.In addition,the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Senior Company buy the part externally or make it internally?
$\begin{array}{lr}\text { Direct materials } & \$ 16 \\\text { Direct labour } & 12 \\\text { Variable overhead } & 12 \\\text { Fixed overhead } & 10 \\\text { Total } & \$ 50\end{array}$

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Definitions:

Carrier

A company or individual that provides transportation services for goods or people.

Straight Bill Of Lading

A document issued by a carrier that specifies the goods being transported are to be delivered to the specified party, without endorsement.

Negotiable Instrument

A document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.

Mode Selection

The process of choosing the most appropriate method of transportation for goods based on factors such as cost, time, and product type.