Answer:
It is more convenient to produce in house. But, the best option would be to produce 2,875 units and buy the rest of 3,375 demand.
Explanation:
Giving the following information:
Cost per drum:
Direct materials $45.40
Direct labor ($18 per hour) 4.50
Manufacturing overhead 4.05
Selling and administrative expense 16.30 70.25
Margin per drum $ 104.75
Management believes 3,375 WVD drums could be sold each year if the company had sufficient manufacturing capacity.
Harcor Industries, Inc., a supplier of quality products, would be able to provide up to 1,800 WVD-type drums per year for $130 per drum.
We will assume that the selling cost will remain whether it is purchased or make in house.
Make in house:
Unitary cost= 45.40 + 4.5 + 4.05 + 70.25= $124.2
Buy= $130
Gross profit (make in house)= 175 - 124.2 - 16.3= 34.5
Gross profit (buy)= 175 - 130 - 16.3= 28.7
It is more convenient to produce in house. But, the best option would be to produce 2,875 units and buy the rest of 3,375 demand.
