Colby Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: Per unit Direct materials $ 32.50 Direct labor 13.00 Variable manufacturing overhead 19.50 Fixed manufacturing overhead 26.00 Total unit cost $ 91.00 An outside supplier has offered to provide Colby Corp. with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. If Colby Corp. accepts the outside offer, what will be the effect on short-term profits

It is cheaper to make the component in house.

Explanation:

Giving the following information:

The unit costs to produce are:

Direct materials= $32.50

Direct labor= $13.00

Variable manufacturing overhead= 19.50

An outside supplier has offered to provide Colby Corp. with the 10,000 subcomponents at an $84.50 per unit price.

Because the fixed costs are unavoidable, we won't take them into account.

Make in-house:

Unitary cost= 32.5 + 13 + 19.5= $65

Buy:

Purchasing price= $84.5

It is cheaper to make the component in house.

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