Lindon

Lindon Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows:

Direct Materials………………………………………..$18,000

Direct Labor………………………………………………20,000

Variable Manufacturing Overhead………………. 12,000

Fixed Manufacturing Overhead………………….. 30,000

Total Costs……………………………………………….80,000

An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon stops producing the part internally, one-third of the manufacturing overhead would be eliminated.

Required: Prepare a make or buy analysis showing the annual advantage or disadvantage of accepting the outside supplier’s offer.