Nalgene manufactures 2,000 units of a par that could be purchased from an outsid

Question

Nalgene manufactures 2,000 units of a par that could be purchased from an outside supplier for $12 each. Manufacturing costs are stated below:

Direct Materials

$5

Direct Labor

$3

Variable Manufacturing Overhead

$3

Fixed Manufacturing Overhead

Fixed Selling and Administrative Costs

$8

$10

     Total

$2

Should Nalgene continue to manufacture the part?

Would your answer change if Nalgene could lease the manufacturing facilities to another company for $5,000 per year?

Direct Materials

$5

Direct Labor

$3

Variable Manufacturing Overhead

$3

Fixed Manufacturing Overhead

Fixed Selling and Administrative Costs

$8

$10

     Total

$2

Explanation / Answer

1 Per unit Total 2000 units Make Buy Make Buy Direct materials 5 10000 Direct labor 3 6000 Variable manufacturing overhead 3 6000 Purchase cost 12 24000 Total 22000 24000 Yes, Nalgene should continue to manufacture the part as it results in savings of $2000 (24000-22000) 2 Make Buy Total cost 22000 24000 Opportunity cost 5000 Total relevant cost 27000 24000 Yes, now Nalgene should purchase the part

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