Make or Buy a Component (14 marks)

For many years, Comstock Company has produced an electrical part that it uses in the production of diesel tractors. The companys unit product cost for the part, based on a production level of 60,000 parts per year, is as follows:

	Per Part	Total
Direct materials	$ 4.00
Direct labour	2.75
Variable manufacturing overhead	0.50
Fixed manufacturing overhead, traceable	3.00	$180,000
Fixed manufacturing overhead, common (allocated on the basis of labour hours)	2.25	$135,000
Unit product cost	$12.50

An outside supplier has offered to supply the electrical parts to Comstock Company for only $10.00 per part. One-third of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other two-thirds of the traceable fixed manufacturing costs consist of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company

Required

1. Assuming that the space being used to produce the parts would otherwise be idle, prepare the computations showing how much profit would increase or decrease as a result of purchasing the parts from the outside supplier rather than having the company make them.
2. Suppose that if the electrical part were purchased, Comstock could use the freed space to rent to a non-competing company. The space could be rented for $9,500 per month. Should they accept the offer to buy the electrical parts from the outside suppler for $10?