Making a decision to manufacture or buy. The Schultz Company is manufacturing a part that it uses in its finished product. Costs of the part, according to the standard cost sheet, are as follows:

One department of the company makes 80,000 units of the part each year. The fixed overhead rate is based on $200,000 of fixed overhead costs allocated to this department. About $80,000 of the fixed overhead would be eliminated if the part were not manufactured. The company has an opportunity to purchase the part from an outside supplier for $6 per unit. Should the company continue to manufacture the part or should it accept the outside offer?

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Costs per Unit Materials $3.00 Labor 1.00 Overhead: Variable 1.20 Fixed 2.50