Meacham Company has traditionally made a part for its major product. Annual production of 20,000 parts resulted in the following costs:
Direct materials $200,000
Direct labor 180,000
Variable overhead 150,000
Fixed overhead 100,000
Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this part each year at a price of $28 per part. Meacham knows that the facilities now being used to make the part could be rented to another company for $75,000 per year if the part were purchased from the outside supplier.
If Meacham decides to purchase the part from the outside supplier, how much higher or lower will net income be than if Meacham continued to make the part? Label your dollar amount as higher or lower. Show calculations to support your answer.
b. Assume that $40,000 of the fixed overhead can be avoided if Meacham decides to buy the part. All other data are the same. If the supplier’s price is $33 per unit, will Meacham choose to make or buy the part? Show calculations to support your answer.
