The Management of Hillsboro Industries Is Evaluating Whether the Company

Essay

The management of Hillsboro Industries is evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. Based upon their accounting records, it appears that it costs the company $80 per unit to make the component. The $80 cost per component was determined as follows: Hillsboro Industries uses 10,000 components per year. After Ricardo Inc. submitted a bid of $70 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 Ricardo Inc., $5 of fixed manufacturing overhead per unit would be avoided and Hillsboro's unused production facilities could be leased to another company for $30,000 per year.
Based upon relevant cost differences, should Hillsboro Industries make or buy the component? Include your supporting calculations.