Benitez Company Currently Outsources a Relay Switch That Is a Component

question 92

Multiple Choice

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:
$$\begin{array} { | l | l | } \hline \text { Unit-level material cost } & \$ 3 \\\hline \text { Unit-level labor cost } & \$ 2 \\\hline \text { Unit-level overhead } & \$ 1 \\\hline \text { Batch-level set-up cost ( } 5,000 \text { units per batch) } & \$ 25,000 \\\hline \text { Product-level supervisory salaries } & \$ 37,500 \\\hline \text { Allocated facility-level costs } & \$ 20,000 \\\hline\end{array}$$

• A)$10,500 more than if the switches are purchased.
• B)$27,000 less than if the switches are purchased.
• C)$20,000 less than if the switches are purchased.
• D)$30,500 more than if the switches are purchased.

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Definitions:

Labor Services

The tasks and efforts provided by workers in exchange for wages.

Foreign Suppliers

Providers of goods and services from outside the buyer's country, often involved in international trade.

Elastic Demand

A situation in economics where the demand for a product changes significantly in response to changes in the price of that product.

Total Productivity

The overall effectiveness and efficiency of an entity in generating outputs from a set of inputs over a specific period of time.