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    Accounting: The make or buy decision

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    Cardinal Company uses a certain part in its manufacturing process that it buys from an outside supplier for $36 per part plus another $5 for shipping and other purchasing-related costs. The company will need 18,000 of these parts in the next year and is considering making that part internally. After performing a capacity analysis, Cardinal determined that it has sufficient unused capacity to manufacture the 18,000 parts but would need to hire a manager at an annual salary of $54,000 to oversee this production activity. Estimated production costs are determined to be:

    Direct material $23.00
    Direct Labor $10.00
    Variable overhead $5.00
    Fixed overhead (including manager at $3 per unit) $8.00
    Total unit cost $46.00


    a) Identify the relevant costs to make this part internally.
    b) Should Cardinal produce the part or continue to buy it from the outside supplier?
    c) What other factors are important to this decision?

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    Solution Summary

    The solution give explanations for questions involving relevant costs and making a decision about buying.