RG Electronics manufactures a small circuit board for use in cell phones at it production facilities in Nova Scotia. When 10,000 items are produced, the costs per unit are:
Direct materials $2.75
Direct manufacturing labour 4.25
Variable manufacturing overhead 1.00
Fixed manufacturing overhead 1.60
Total $9.60
Atlantic Electronics has offered to sell 10,000 units of the same circuit board to RG Electronics for a cost of $6.25 per unit. The “freed up” plant facilities at RG Electronics could be used to manufacture another item, currently being purchased from a different outside supplier, at a savings of $5,000 if RG accepts the offer. In addition, $0.50 per unit of fixed manufacturing overhead on the original item would be eliminated.
a. Prepare an analysis of the two alternatives (Make or Buy) and make a recommendation to RG Electronics. Show your calculations and indicate the net benefit or net disadvantage of accepting the offer.
b. What other (qualitative) factors should they consider before making the decision to buy from the outside supplier?
