A Florist Produces Table Settings for Weddings

Essay

A florist produces table settings for weddings. Based on an annual volume of 10,000 units it incurs $100,000 in fixed manufacturing costs. Variable costs per unit are $16 for direct materials, $3 for direct manufacturing labour, and $14 for variable factory overhead.
Another company has offered to supply empty baskets for the settings for $8, with a minimum annual order of 5,000 units. If the florist accepts the offer, it will be able to reduce variable labour and overhead costs by 50 percent. The materials for the empty baskets will cost $4 if the florist assembles them.
Required:
a. Determine if they should make or assemble the empty baskets.
b. Should they make or assemble the empty baskets if they could rent the space that the basket assembly requires for $16,000 per year to another company?