Clear Sailing Lifeboats uses 12,000 units of a certain component in production each year. Presently, this component is purchased from an outside supplier at $9.50 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this component. The costs associated with manufacturing the component internally rather than buying it from the outside supplier are Direct materials $3 per unit Direct Labor $3 per unit Variable Overhead $2 per unit Fixed Overhead (based on production of 8,000 units per month) $2 per unit Annual salary of new supervisor $12,000 Assuming other things stay the same, at what price per unit from the outside supplier would the company be indifferent (on economic grounds) to buying or making the components?

Question

Camille Beasley

Business

19 January, 08:00

Clear Sailing Lifeboats uses 12,000 units of a certain component in production each year. Presently, this component is purchased from an outside supplier at $9.50 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this component. The costs associated with manufacturing the component internally rather than buying it from the outside supplier are Direct materials $3 per unit Direct Labor $3 per unit Variable Overhead $2 per unit Fixed Overhead (based on production of 8,000 units per month) $2 per unit Annual salary of new supervisor $12,000 Assuming other things stay the same, at what price per unit from the outside supplier would the company be indifferent (on economic grounds) to buying or making the components?

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Answers (1)

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Justin Rivera · Answer 1

The indifference price will be $10.33 for the current purchase level of 12,000 units.

Explanation:

Giving the following information:

The costs associated with manufacturing the component internally rather than buying it from the outside supplier are Direct materials $3 per unit Direct Labor $3 per unit Variable Overhead $2 per unit Fixed Overhead (based on production of 8,000 units per month) $2 per unit Annual salary of new supervisor $12,000

Fixed costs = 12,000 + 8,000 units*2 = $28,000

Variable costs = 3+3+2 = $8

Unitary costs for 12,000 units = 8 + (28000/12,000) = $10.33

The indifference price will be $10.33 for the current purchase level of 12,000 units.