Louder Company produces part MNO utilized in several of its truck models. 10,000 units are manufactured each year with production costs as follows:
Direct materials $ 45,000
Direct manufacturing labor 15,000
Variable support costs 35,000
Fixed support costs 25,000
Total costs $120,000
Louder Company has option of buying part MNO from the outside supplier at $11.20 per unit. If MNO is outsourced, 40% of fixed costs cannot be immediately converted to other uses.
problem 1: What amount of MNO production costs is avoidable?
problem 2: Must company outsource MNO? Why or why not?
problem 3: What other items must company consider before outsourcing any of parts it presently produces?