Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Junior Company that a 20% increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units):
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Junior Company buy the part externally or make it internally?
Definitions:
Common Law
A legal system based on court decisions and precedents rather than statutory laws.
UCC
Uniform Commercial Code, a comprehensive set of laws that govern commercial transactions in the United States, aimed at standardizing practices across states.
Counteroffer
A response to an offer in negotiations that presents different terms than originally proposed, effectively rejecting the initial offer.
Original Offer
The initial proposal or terms presented during negotiations or when making a deal, before any modifications are made.
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