Answer to Question #59215 in Microeconomics for TRAN VAN DAT

Question

Swagat Manufacturing Sdn. Bhd. needed to determine if it would be cheaper to make 10,000 units of a component in-house or to purchase them from an outside supplier for $4.75 each.
Cost information on internal production includes the following:
Total Cost Unit Cost
$ $

Direct materials 10,000 1.00
Direct labour 20,000 2.00
Variable overheads 8,000 0.80
Fixed overheads 44,000 4.40
Total 82,000 8.20
Fixed overhead will continue whether the component is produced internally or externally. No additional costs of purchasing will be incurred beyond the purchase price.
Required:
b. Which alternative is more cost effective and by how much?
c. Now assume that the fixed overhead includes $10,000 of cost that can be avoided if the component is purchased externally. Which alternative is more cost effective and by how much?