Senior Company currently buys 35,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20 percent increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 35,000 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 Senior Company buy the part externally or make it internally?
Definitions:
Marginal Tax Rate
The tax rate paid on the next dollar earned.
Average Tax Rate
Total amount of tax paid divided by total income.
Total Taxes
The aggregate amount of taxes collected by a government from individuals and businesses.
Taxable Income
The portion of an individual or entity's income that is subject to taxation, after deductions and exemptions, according to the law.
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