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A company manufactures telephones

Accounting

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A company manufactures telephones. The company is currently operating at full capacity and variable manufacturing costs are charged to produce at the rate of 25% of direct labour cost.

Consider the following information:

Direct Materials cost per unit equals to 30€

Direct Labour cost per unit equals to 10€

Normal Production is 50.000 units per year

The 30.000€ of Fixed Manufacturing Overheads cannot be eliminated in case the production stops and will have to be absorbed by other products.

A supplier offers to make the telephones at a price of 40€ each. Should the company buy the telephones from the outside supplier?