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Walton Co. purchases the 400,000 compressors that it installs in its refrigerators from a Chinese...

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Accounting

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Walton Co. purchases the 400,000 compressors that it installs in its refrigerators from a Chinese company for the price of $26 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. . However, the company's mechanical engineer is opposed to making the compressors because the production cost per unit is $28 as shown below: Per unit Total Direct material 9.00 Direct labor 7.00 4.50 $18,00,000 Supervisor's salary Depreciation on machinery 2.50 Rent 1.00 400,000 Variable manufacturing overhead 4.00 $16,00,000 Total production cost 28.00 If Walton Co. decides to make the compressors, a supervisor would have to be hired (at a salary of $18,00,000) to oversee production. However, the company does not need to purchase any new equipment. The rent charge above is based on space utilized in the plant. The total rent on the factory is $ 24,00,000 per period. Required: What is the financial advantage (disadvantage) of making the 400,000 compressors instead of buying them from an outside supplier

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