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Question - United Automobile Co. manufactures part X12 used in several of its truck models. 1,000 units are produced each year with production costs as follows:
Direct materials $70,000
Direct manufacturing labor 50,000
Variable support costs 40,000
Fixed support costs 80,000
Total costs $240,000
The company has the option of purchasing part X12 from an outside supplier at $200 per unit. If X12 is outsourced, 30% of the fixed costs cannot be immediately converted to other uses.
Required -
a. Describe avoidable costs. What amount of the X12 production costs is avoidable?
b. Should the company outsource X12? Why or why not?
c. What other items should the company consider before outsourcing any of the parts it currently manufactures?
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