Tony’s Electronic Corporation needs 12,000 units of a certain part to be used in the production of its karaoke machines. If Tony’s Electronics buys the part from Scott Company instead of making it themselves, Tony’s could not use the present facilities for another manufacturing activity. Sixty percent of the fixed overhead applied will continue regardless of what decision is a made. The following quantitative information is available regarding the situation presented:
Cost to make the part:
Direct materials $5
Direct labor 25
Variable overhead 12
Fixed overhead applied 15
Cost to buy the part: $45
A. In deciding whether to make or buy the part, what are Tony’s total relevant costs to make the part?
B. Which alternative (make or buy) is more desirable for Tony’s and by what amount?
C. Suppose that Tony’s Electronics Corporation is in an area of the country with high unemployment and that it is unlikely that displaced employees will find other employment. How might that impact your decision?