The Dowdy Company manufactures components for use in producing one of its finished products. When 12000 unit are produced the full cost per unit is 35.
Calculated as follows:
Direct materials 5
direct labor 15
Variable Overhead 10
Fixed Overhead 5
The huang company has offered to sell 12000 components to dowdy for 37 each. If dowdy accepts the offer some of the facilities currently being used to
manufacture the components can be rented as warehouse space for 40000.However 3 of the Fixed overhead would have to be covered by dowdys other products in
other words these fixed costs would not go away.
Ignoring all other qualittative issues thus assuming dowdy was only concerned about profits answer the following.
Should the make or buy the product and
What is the cost difference between the two alternatives?