Houston Ltd Johnson Company Has Offered to Sell Houston Ltd

Short Answer

Houston Ltd. manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: $\begin{array}{lr} \text {Direct materials}&£32\\\text {Direct labour}&40\\\text {Variable overhead}&16\\\text {Fixed overhead}&32\\\text {Total}&£120\\\end{array}$ Johnson Company has offered to sell Houston Ltd. 5,000 units of the part for £112 per unit. If Houston Ltd. accepts Johnson Company's offer, total fixed costs will be reduced to £60,000. What alternative is more desirable and by what amount is it more desirable? $$\begin{array} { l l r } & \text { Alternative } & \text { Amount } \\a.&\text { Make } & £ 20,000 \\b. &\text { Make } & £ 120,000 \\c.&\text { Buy } & £ 40,000 \\d.&\text { Buy } & £ 100,000 \\ e. &\text {Buy } & £ 140,000\end{array}$$