Logan Manufacturing currently outsources a part that is a component in one of its products. The parts cost $35 each. The company is considering making the part internally at the following projected annual production costs:

direct material cost $ 7
direct labor cost $ 6
variable overhead $ 5
Batch-level set-up cost for this part (8,000 units per batch) $ 50,000
Product-level supervisory salaries $ 50,000
Allocated fixed facility-level costs $ 45,000

The company expects an annual need for 8,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $4,000 a month. The supervisor will need to be hired for the production of this part. If the company decides to make the part, total costs will be:

Question

Logan Manufacturing currently outsources a part that is a component in one of its products. The parts cost $35 each. The company is considering making the part internally at the following projected annual production costs:

direct material cost	$	7	 
direct labor cost	$	6	 
variable overhead	$	5	 
Batch-level set-up cost for this part (8,000 units per batch)	$	50,000	 
Product-level supervisory salaries	$	50,000	 
Allocated fixed facility-level costs	$	45,000

The company expects an annual need for 8,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $4,000 a month. The supervisor will need to be hired for the production of this part. If the company decides to make the part, total costs will be:

BlackTom AI · Accepted Answer

We are comparing the cost of making the part in-house versus buying it externally, given the annual need is 8,000 units.
First, compute the per-unit variable costs if we make:
direct material 7 + direct labor 6 + variable overhead 5 = 18 per unit.
Total variable cost for 8,000 units = 18 × 8,000 = 144,000.
Next, identify fixed and batch costs that are incurred if we decide to make:
- Batch-level setup cost for this part (8,000 units per batch) = 50,000 (this is a one-time cost for the batch).
- Product-level supervisory salaries = 50,000 (fixed, already provided as ongoing cost when making).
- Allocated fixed facility-level costs = 45,000 (fixed allocation that would continue to be expensed).
- Space rental for manufacturing in the currently leased space = 4,000 per month × 12 months = 48,000 per year (opportunity or usage cost because we’ll use the space).
- The supervisor will need to be hired for production = 50,000 (additional fixed cost for this new production line).
Now sum all these annual costs if we make the part:
Variable costs: 144,000
Batch setup: 50,000
Product-level salaries: 50,000
Allocated fixed costs: 45,000
Lease space: 48,000
New supervisor: 50,000
Total cost to make = 144,000 + 50,000 + 50,000 + 45,000 + 48,000 + 50,000 = 337,000.
Next, compute the cost if we purchase the part externally:
Purchase cost = 8,000 units × 35 per unit = 280,000.
Now compare making versus buying:
- Cost to make: 337,000
- Cost to buy: 280,000
Difference = 337,000 − 280,000 = 57,000.
This means making the part internally would cost $57,000 more than buying.
Reviewing the answer options:
- "$45,000 less than if the switches are purchased.": incorrect, suggesting a cost savings rather than an expense difference.
- "$57,000 more than if the switches are purchased.": matches the calculated difference, indicating higher cost to make.
- "$38,000 less than if the switches are purchased.": incorrect, implies a savings rather than a cost increase.
- "$12,000 more than if the switches are purchased.": incorrect, the computed difference is 57,000, not 12,000.
The key sources of the difference are the added fixed costs (new supervisor, space lease, product and facility-level costs) that accompany making, plus the batch setup cost, all of which push the total above the pure variable and purchase price.

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