Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs: Cost per unit ($) Direct Materials 28 Direct Labor 18 Variable Overhead 16 Allocated Fixed Overhead 4 Required 1. What is the relevant cost to make the product internally? 2. What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?
Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. If Terry does not purchase these parts from the subcontractor, it must continue to produce them in-house with these costs:
Cost per unit
($)
Direct Materials 28
Direct Labor 18
Variable Overhead 16
Allocated Fixed Overhead 4
Required
1. What is the relevant cost to make the product internally?
2. What is the estimated increase or decrease in short-term operating profit of producing the product internally versus purchasing the product from a supplier?
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