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

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):
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?
$\begin{array}{lr}\text { Direct materials } & \$ 16 \\\text { Direct labour } & 12 \\\text { Variable overhead } & 12 \\\text { Fixed overhead } & 10 \\\text { Total } & \$ 50\end{array}$