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Costs of production of water valves

Water valves costs $20.00 each. A company is considering making water valves internally at the following projected annual production costs:

Unit level material costs $ 3.00
Unit level labor cost 2.00
Unit level overhead 1.00
Batch level set up costs (5,000 units per batch) $25,000
Product level supervisory salaries $37,000
Allocated facility costs $20,000

If the company expects an annual need for 5,000 valves. If the company make the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the co decides to make the part, total cost will be?

Solution Preview

This calculation is for one year of activity:

Cost/Unit Cost/5000 Total/unit
Variable costs
Materials 3
Labor 2
Factory overhead ...

Solution Summary

The solution calculates the tota cost of production for water valves, as compared to purchase of valves. A good explanation is produced.