Senior Company Currently Buys 30,000 Units of a Part Used

question 54

Essay

Senior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20% increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): $$\begin{array} { l r } \text { Direct materials } & \$ 16 \\\text { Direct labour } & 12 \\\text { Variable overhead } & 12 \\\text { Fixed overhead } & { 10 } \\\text { Total } & \underline { \$ 50 }\end{array}$$ 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 Senior Company buy the part externally or make it internally?