Alto Company currently produces component TH1 for its sole product. The equipment that it uses to produce TH1 must be replaced, and management must decide whether to replace the equipment or buy TH1 from an outside supplier. The current cost per unit to manufacture its required 400,000 units of TH1 follows.
Direct materials . . . . . . . . . $1.20
Direct labor . . . . . . . . . . . . . 1.50
Overhead . . . . . . . . . . . . . . 6.00
Total cost per unit . . . . . . . $8.70
Direct materials and direct labor are 100% variable. Overhead is 75% fixed, and the current fixed overhead includes $1 per unit depreciation on the old equipment. If management buys the new equipment, it will incur depreciation of $1.50 per unit. An outside supplier has offered to supply the 400,000 units of TH1 for $4 per unit.
Required
1. Determine whether management should make or buy the TH1.
2. What factors besides cost must management consider when deciding whether to make or buy TH1?