Final answer:
Ferro, Inc. should purchase steel wheels from an outside supplier as it is more cost-effective compared to producing them internally.
Step-by-step explanation:
The question asks which alternative is most cost-effective for Ferro, Inc., an automobile manufacturing company, when it comes to producing steel wheels. The company currently produces 150,000 units of steel wheels each year at a unit cost of $41. An outside supplier has offered to supply steel wheels for $35 each. To determine the most cost-effective option, we need to compare the total cost of producing 150,000 units internally versus purchasing them from the outside supplier.
If Ferro, Inc. decides to produce the steel wheels internally, the total cost would be:
- Direct materials: $13.00 x 150,000 = $1,950,000
- Direct labor: $12.00 x 150,000 = $1,800,000
- Variable overhead: $11.00 x 150,000 = $1,650,000
- Fixed overhead: $5.00 x 150,000 = $750,000
Total cost = $1,950,000 + $1,800,000 + $1,650,000 + $750,000 = $6,150,000
If Ferro, Inc. decides to purchase the steel wheels from the outside supplier, the total cost would be:
Purchase cost = $35 x 150,000 = $5,250,000
Comparing the total costs, we can see that it is more cost-effective for Ferro, Inc. to purchase the steel wheels from the outside supplier ($5,250,000) rather than producing them internally ($6,150,000). Therefore, the company should choose the alternative of purchasing steel wheels from the outside supplier.