Grayson Enterprises currently manufactures part A-14, one of the component parts used to assemble the company's main product. Specialty Parts has offered to make part A-14 for $12.50 per unit.
Grayson's per-unit cost to make part A-14 is $14.75, as follows:
Direct materials............................ $5.00
Direct labor ................................ 6.00
Variable factory overhead ............... 1.75
Fixed factory overhead ............... 2.00
None of Grayson's fixed overhead costs will be eliminated if the part is purchased. However, the plant space currently used to manufacture the part can be leased to another company for $30,000 per year. Assuming that Grayson needs 100,000 parts per year, should the company continue to make part A-14 or buy it?