Benitez Company currently outsources a relay switch that is a component in one of its products.The switches cost $20 each.The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{ll}
\text { Unit-level material cost } & \$3 \
\text { Unit-level labor cost } & \$2 \
\text { Unit-level overhead } & \$1 \
\text { Batch-level set-up cost (5,000 units per batch) } & \$ 25,000 \
\text { Product-level supervisory salaries } & \$ 37,500 \
\text { Allocated facility-level costs } & \$ 20,000
\end{array}$ The company expects an annual need for 5,000 switches.If the company makes the product,it will have to utilize factory space currently being leased to another company for $1,500 a month.If the company decides to make the parts,total costs will be:
A) $10,500 more than if the switches are purchased.
B) $27,000 less than if the switches are purchased.
C) $20,000 less than if the switches are purchased.
D) $30,500 more than if the switches are purchased.

Question

Benitez Company currently outsources a relay switch that is a component in one of its products.The switches cost $20 each.The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{ll}
\text { Unit-level material cost } & \$3 \
\text { Unit-level labor cost } & \$2 \
\text { Unit-level overhead } & \$1 \
\text { Batch-level set-up cost (5,000 units per batch) } & \$ 25,000 \
\text { Product-level supervisory salaries } & \$ 37,500 \
\text { Allocated facility-level costs } & \$ 20,000
\end{array}$  The company expects an annual need for 5,000 switches.If the company makes the product,it will have to utilize factory space currently being leased to another company for $1,500 a month.If the company decides to make the parts,total costs will be:
A) $10,500 more than if the switches are purchased.
B) $27,000 less than if the switches are purchased.
C) $20,000 less than if the switches are purchased.
D) $30,500 more than if the switches are purchased.

Quizplus · Accepted Answer

If the company makes the switches internally, the annual production cost will be:
$22,000 (direct material) + $12,000 (direct labor) + $18,000 (variable factory overhead) + $24,000 (fixed factory overhead) = $76,000
The cost per switch will be $76,000/5,000 = $15.20.
If the company purchases the switches, the total cost will be $20 x 5,000 = $100,000.
Therefore, if the company makes the switches internally, the total cost will be $76,000 + $18,000 (leased space cost) = $94,000, which is $6,000 more than if the switches are purchased ($100,000 - $94,000 = $6,000).
Therefore, the best choice is A, which states that the total cost will be $10,500 more than if the switches are purchased (which is the $6,000 additional cost plus the $4,500 monthly lease cost for a year).

Benitez Company Currently Outsources a Relay Switch That Is a Component