Reference no: EM132013422

Problem - Teich Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 15,000 of the components each year. The unit product cost of the component according to the company's absorption cost accounting system is given as follows:

 Direct materials - $ 7.90

 Direct labor - 2.10

 Variable manufacturing overhead - 1.10

 Fixed manufacturing overhead - 4.00

 Unit product cost - $15.10

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 10% is avoidable if the component were bought from the outside supplier; the remainder is not avoidable. Also, the facilities now used could be rented to another company for $ 45,000 per year (an opportunity cost!). An outside supplier has offered to sell Teich similar components for $ 14.75 per unit.

A) If Teich chooses to buy the part from the outside supplier, what is the change in annual net income due to accepting the offer vs. making?

B) Based on all of the above information, what is the highest price that Teich could pay theoutside supplier for each component and be economically indifferent between making or buying the parts?