Collins, Inc. has been manufacturing 5,000 units of part 10541 per month, which is used in manufacturing one of its products. At this level of production, the cost per unit to manufacture part 10541 follows:
Direct materials .......................................................$6.00
Direct labor............................................................ 22.00
Variable overhead................................................... 8.00
Fixed overhead..................................................... 12.00
Total ...................................................................... $48.00
Thatcher Company has offered the sell Collins 5,000 units of part 10541 for $44 a unit. Collins has determined that it could use the facilities presently used to manufacture part 10541 to manufacture produce RAC, which would generate an additional contribution margin per month of $30,000. Collins also has determined that one-third of the fixed overhead will be incurred even if it purchases part 10541 from Thatcher and makes product RAC.
Required:
Determine whether or not Collins should purchase from Thatcher. Assume that Collins would take the opportunity to make product RAC.