The Management of Freeman Industries Has Been Evaluating Whether the Company

Essay

The management of Freeman Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier.A $100 cost per component was determined as follows:
Direct material                                                                 $\$ 15$
Directlabor                                                                         40
Variable manufacturing overhead                                       10
$\text { Fixed manufacturing overhe ad }$                         $\underline{35}$
                                                                                            $\underline{\$100}$
Freeman Industries uses 4,000 components per year. After Noel Corporation submitted a bid of $80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Noel Corporation, Freeman Industries' unused production facilities could be leased to another company for $50,000 per year.
Required:
a. Determine the maximum amount per unit Freeman Industries could pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.
c. Assume the company could eliminate one production supervisor with a salary of $30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.