Mother Hubbard Company Purchases 8,000 Units of a Part That

Essay

Mother Hubbard Company purchases 8,000 units of a part that it needs for production of its product. Notification has just been received from the supplier that a price increase will take effect shortly which will bring the price of each part to $25. Mother Hubbard Company is considering using some idle facilities to produce the part. The production costs to produce the needed 5,000 parts are as follows: $\begin{array}{ll}\text { Direct materials } & \$ 17,500 \\\text { Direct labor } & 30,000 \\\text { Variable factory overhead } & 14,000 \\\text { Fixed factory overhead } & 33,500\end{array}$ The idle facilities could also be rented out at an annual rent of $99,000. All the factory overhead costs are avoidable.
Required: Determine if Mother Hubbard Company should continue to buy the part or produce it in- house.