Question

To make a batch of 1,000 units, it is estimated that 120 direct labor hours are required at a cost of $10 per hour. Direct material costs are estimated at$1,500 per batch. The overhead costs are calculated based on an overhead rate of $7.50 per direct labor hour. The item can be readily purchased from a local vendor for$4 per unit.

a. Should the item be manufactured or purchased?

Answer 1

To decide whether to manufacture or purchase an item, we compare the total in-house production cost of $3,600 with the external purchase cost of $4,000 for 1,000 units. Manufacturing the item in-house is more cost-effective than purchasing it.

Step-by-step explanation:

The student's question involves deciding whether to manufacture an item in-house or to purchase it from a local vendor based on cost estimates. To make a batch of 1,000 units, the direct labor and overhead costs must be calculated and compared with the cost of purchasing the item externally.

First, we calculate the in-house production costs:

• Direct labor cost: 120 hours × $10/hour = $1,200
• Overhead cost: 120 hours × $7.50/hour = $900
• Direct material cost: $1,500
• Total in-house production cost: $1,200 + $900 + $1,500 = $3,600

Next, we calculate the cost to purchase: $4/unit × 1,000 units = $4,000.

Since the in-house production cost ($3,600) is less than the purchase cost ($4,000), it is more cost-effective for the company to manufacture the item themselves.