Question 174286: Can someone please help me with this problem:
A light company currently outsources an electrical switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs:
Unit-level material cost: $3
Unit-level labor cost: $2
Unit-level overhead: $1
Batch-level set-up cost(5,000 units per batch): $25,000
Product-level supervisory salaries: $37,500
Allocated faclity-level costs: $20,000
The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decided to make the parts, total costs will be:
$30,500 more than if switches were purchased
$27,000 less than if switches were purchased
$20,000 less than if switches were purchased
$10,500 more than if switches were purchased
Answer by solver91311(24713)   (Show Source):
You can put this solution on YOUR website! If they continue to outsource the item, their total cost will be 5,000 X $20.
If they make the switches themselves, then it will cost:
$3 + $2 + $1 = $6 per switch times 5000 switches PLUS
$25,000 batch set-up PLUS
$37,500 salaries PLUS
$20,000 factory cost PLUS
$1,500 times 12 months lost lease revenue.
Add up all of the costs to make the switches themselves and compare it to the total cost of continuing to outsource. You can do your own arithmetic.
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