Each year, Subramanian Company produces 20,000 units of a component used in radar detectors. An outside supplier has offered to supply the part for $2.36. The unit cost is:

Overhead is applied on the basis of machine hours; the component requires 10,000 machine hours per year.
Required:
1. What are the alternatives for Subramanian Company?
2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production and of external purchase.
3. Which alternative is more cost effective and by how much?
4. What if $37,000 of fixed overhead is rental of equipment used only in production of the component that can be avoided if the component is purchased? Which alternative is more cost effective and by how much?LO1

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Direct materials $0.50 Direct labor 0.62 Variable overhead 0.24 Fixed overhead 2.75 Total unit cost $4.11