Benitez Company Currently Outsources a Relay Switch That Is a Component

question 124

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: $$\begin{array} { | l|r | } \hline \text { Unit-level material cost } & \$ 3 \\\hline \text { Unit-level labor cost } & \$ 2 \\\hline \text { Unit-level overhead } & \$ 1 \\\hline \text { Batch-level set-up cost } ( 5,000 \text { units per batch) } & \$ 25,000 \\\hline \text { Product-level supervisory salaries } & \$ 37,500 \\\hline \text { Allocated facility-level costs } & \$ 20,000 \\\hline\end{array}$$ 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:

• 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:

Inventory

The goods and materials a business holds for the ultimate goal of resale or repair.

Benchmarking

The act of measuring a company's operations and performance indicators against the industry's highest standards or optimal practices.

Industry Average

The standard or average benchmark of performance, costs, or pricing for businesses within a specific industry.

Competitive Average

A benchmarking tool that compares a company's performance metrics with those of its competitors to identify areas for improvement.