Jax Co. manufactures a product which requires a component that they currently produce themselves. They...
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Accounting
Jax Co. manufactures a product which requires a component that they currently produce themselves. They produce 50,000 units per year. Following are the product costs to manufacture the component:
Direct materials $500,000
Direct labor 200,000
Variable manufacturing overhead 80,000
Fixed manufacturing overhead 90,000
Total manufacturing costs $870,000
Total cost per unit $870,000/50,000 $17.40
Jax Co. could purchase the component from Parts, Inc for $15 per unit. If they purchase the component all variable costs would be eliminated but they would retain $60,000 of the fixed costs.
Should Jax Co purchase the component from Parts, Inc.?
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