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July 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: unit-level material cost $ 3 unit-level labor cost $ 2 unit-level overhead $ 1 batch-level set-up cost (5,000 units per batch) $ 25,000 product-level supervisory salaries $ 37,500 allocated facility-level costs $ 20,000 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. Moreover the company would need to hire an additional supervisor. If the company decides to make the parts, total costs will be: a. $27,000 less than if the switches are purchased. B. $20,000 less than if the switches are purchased. C. $10,500 more than if the switches are purchased. D. $30,500 more than if the switches are purchased.



Answer :

Parrain

The total costs if the company decides to make the parts, given the cost of making the part versus purchasing it, will be C. $10,500 more than if the switches are purchased.

What are the costs of purchasing v. buying ?

The cost of purchasing to July company would be :

= Number of switches x Cost of each switch

= 5, 000 x 20

= $ 100, 000

The cost to make the switches would be :

= Material cost + Labor cost + Overhead cost + Set up costs + Supervisor salary + Rent lost

= ( ( 3 + 2 + 1 ) x 5, 000 units ) + 25, 000 + 37, 500 + ( 1, 500 x 12 )

= $ 110, 500

Difference in cost :

= 110, 500  - 100, 000

= $ 10, 500

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