Reference no: EM132778685
Problem - Wizard World specializes in manufacturing game consoles. Since it is important that the consol be on the shelves for Christmas. the manager of Wizard World is considering an offer from another electronic manufacturer to supply the key component for $5.00 per unit. This is a common practice in the electronic game industry as there is a need to act quickly to get the product to market before demand shifts.
Wizard World's Accountant developed the following cost estimates for the production of the key component:
Cost per Unit of Key Component
Direct material $2.50
Direct labour 0.75
Production overhead 1.84
Corporate overhead 0.40
Cost of key component $5.49
The accountant has also provided the following information:
The component can be produced using current machinery that has a capacity to produce 500,000 units per month and is 50% utilized.
The anticipated demand for the units will not exceed 50,000 units a month, according to the sales team.
Half of the production overhead is fixed.
The corporate overhead allocation is based on 16.0% of the direct materials charge.
Required -
1. Compute monthly net benefit of making the components rather than buy the components from the supplier.
2. State whether Wizard World should make the key component or buy from the supplier.