Currently, this part is being produced by outside vendor at the cost of $9.25 pe

Question

Currently, this part is being produced by outside vendor at the cost of $9.25 per unit. Your firm buys 100,000 units per year from this ve ndor. Management wants to bring production of this part "in -house". The accounting department adviced that additional costs will have to be incurred when the part is manufactured in-house". These costs are: fixed, labor, factory overhead, raw materials. What is the maximum level of those additional costs (S for all 100,000 unit) before this move cannot be justified on the economic basis?

Explanation / Answer

THE VENDOR PRODUCE THE PARTS AT COST 9.25 PER UNIT.

TOTAL UNITS = 100000

TOTAL COST TO VENDOR = 100000 *9.25 = 925000

NOW IT IS VERY MUCH ACCEPTABLE THAT VENDOR MUST BE EARNING FROM US. THAN HE MIGHT BE ADDING PROFIT MARGIN TO TOTAL COST OF 925000 WHICH BECOMES THE SALE PRICE FOR US WHICH WE WERE PAYING TO VENDOR.

THAN MAXIMUM COST FOR INHOUSE PRODUCTION AFFORDABLE WILL BE THAT SALE PRICE FOR PURCHASING 100000 UNITS FROM THAT VENDOR.

OR

WE CAN SAY THAT

925000 COST + SERVICE CHARGES PAID TO VENDOR FOR OUTSIDE PRODUCTION FOR US = MAXIMUM PRICE WE CAN AFFORD FOR IN HOUSE PRODUCTION.

MORE THAN THAT CAN NOT BE AFFORDABLE.

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