Loro Company is currently manufacturing part Q108, producing 35,000 units annually. The part is used in the production of several products made by Loro. The cost per unit for Q108 is as follows:

Direct materials ..................................... $6.00

Direct labour ........................................2.00

Variable overhead .................................1.50

Fixed overhead .....................................3.50

Total .................................................. $13.00

All of the fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Loro for $11. There is no alternative use for the facilities currently used to produce the part.

Required:

1. Should Loro Company make or buy part Q108?

2. What is the most Loro would be willing to pay an outside supplier?

3. If Loro buys the part, by how much will income increase or decrease?