The management of SouthPak Company has asked for your assistance in deciding whether to continue manufacturing a part or to buy it from an outside supplier. The part, called AlphaB, is a component of SouthPak’s finished product. An analysis of the accounting records and the production data revealed the following information for last financial year.

1. The production department produced 72 000 units of AlphaB.

2. Each unit of AlphaB requires 20 minutes to produce. Six people in the production department work full-time (4000 hours each per year) producing AlphaB. Each person is paid $12 per hour.

3. The cost of materials per AlphaB unit is $4.

4. Manufacturing costs directly applicable to the production of AlphaB are:

Indirect labour ............. $15 000
Utilities .............................. 3 000
Depreciation .................... 3 600
Rates and insurance ....... 2 000

All of the above costs will be eliminated if AlphaB is purchased.
5. The lowest price for AlphaB from an outside supplier is $8 per unit. Delivery costs will be $0.80 per unit, and a part-time dispatch employee at $17 000 per year will be required.

6. If AlphaB is purchased, the excess space will be used to store SouthPak’s finished product. Currently, SouthPak rents storage space at approximately $1.60 per unit stored per year.

Approximately 9000 units per year are stored in the rented space.

Required

Should SouthPak make or buy the part? Show all calculations.