Question

Oriole Company must decide whether to make or buy some of its components. The costs of producing 61,000 switches for its generators are as follows. Direct materials $29,280 Variable overhead $51,240 Direct labour 42,700 Fixed overhead 60,390 Instead of making the switches at an average cost of $3.01 ($183,610 ÷ 61,000), the company has an opportunity to buy the switches at $2.81 per unit. If the company purchases the switches, all the variable costs and one-third of the

Answer 1

The Oriole Company is considering whether to produce switches in-house or buy them externally, weighing average production costs against purchase costs. This requires analysis of both variable and fixed costs and understanding of economies of scale, which show a reduction in average cost with increased production to a certain level.

Step-by-step explanation:

The student's question involves a decision by the Oriole Company regarding whether to make or buy components, specifically switches for its generators. This is a cost analysis situation where the company needs to consider the average cost per unit of producing the switches in-house versus the cost per unit to purchase them externally. When performing this analysis, the company must account for both variable and fixed costs, as well as any potential changes in these costs if the decision is made to buy rather than make the components.

In the given scenario, Oriole Company is comparing its own production costs of $3.01 per switch to an external purchase price of $2.81 per switch. To properly evaluate this decision, it's important to consider the economies of scale, as illustrated in the reference figures showing different average production costs based on plant size and output levels. The figures highlight how, as production increases, the average cost of production can decrease up to a certain point, beyond which the average cost remains constant even with increased production capacity.