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    Sycamore Company uses a certain part in its manufacturing pr

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    Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other purchasing-related costs. The company will need 14,400 of these parts in the next year and is considering making that part internally. After performing a capacity analysis, Sycamore determined that it has sufficient unused capacity to manufacture the 14,400 parts but would need to hire a manager at an annual salary of $43,200 to oversee this production activity. Estimated production costs are determined to be:

    Direct material $18.00
    Direct Labor $8.00
    Variable overhead $4.00
    Fixed overhead (including manager at $3 per unit) $7.00
    Total unit cost $37.00

    Required:

    a) Identify the relevant costs to make this part internally.

    b) Should Sycamore 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 Preview

    A) Relevant costs to make the part internally:

    Direct Materials $18.00
    Direct labor $8.00
    Variable Overhead $4.00
    Manger's Salary $3.00
    Total Relevant Costs $33.00

    B) Although the purchase price and the relevant cost make price are the same, with both at $33, it would be less expensive for ...

    Solution Summary

    Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other purchasing-related costs. The company will need 14,400 of these parts in the next year and is considering making that part internally. After performing a capacity analysis, Sycamore determined that it has sufficient unused capacity to manufacture the 14,400 parts but would need to hire a manager at an annual salary of $43,200 to oversee this production activity. Estimated production costs are determined to be:

    Direct material $18.00
    Direct Labor $8.00
    Variable overhead $4.00
    Fixed overhead (including manager at $3 per unit) $7.00
    Total unit cost $37.00

    Required:

    a) Identify the relevant costs to make this part internally.

    b) Should Sycamore produce the part or continue to buy it from the outside supplier?

    c) What other factors are important to this decision?

    $2.19

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