Question

Namaste, Inc. makes a line of bathroom accessories. A decline in sales has left the organization with 10,000 machine hours of idle capacity at their disposal each year. This idle capacity could be used by the company to manufacture, rather than buy, one of the pieces used in its production process. Namaste needs 5,000 units of this component each year. This component is currently being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component is $4.10 per unit, and additional supervisory costs are $18,000 per year. Already existing fixed costs that would be allocated to this part come to a total of $300,000 per year.

How much would the company's overall annual NOI increase/decrease as a result of making the component, rather than purchasing it?

Answer 1

Statement Showing Inccremental Analysis
	Make	Buy	Difference
Variable production cost (5000 * 4.10)	20,500
Additional supervisory cost	18,000
Purchase cost (5000 X 7.50)		37,500
Total relevant cost	38,500	37,500	1,000
NOI Will decreased by $1000 as result of making the product instead of Buy it

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