2. Great Company manufactures 60, 000 units of part XL-40 each year for use on its production line. The

following are the costs of making part XL-40:

Total CostsCost per

60, 000 unitsunit

Direct materialBr. 480, 000Br.8

Direct labor360, 0006

Variable factory overhead (FOH)180, 0003

Fixed FOH360, 0006

Total manufacturing costsBr. 1, 380, 000Br.23

Another manufacturer has offered to sell the same part to Great for Br.21 each. The fixed overhead

consists of depreciation, property taxes, insurance, and supervisory salaries. The entire fixed overhead

would continue if the Great Company bought the component except that the cost of Br. 120, 000

pertaining to some supervisory and custodial personnel could be avoided.

Instructions:

a) Should the parts be made or bought? Assume that the capacity now used to make parts

internally will become idle if the pats are purchased?

b) Assume that the capacity now used to make parts will be either (i) be rented to nearby

manufacturer for Br. 60, 000 for the year or (ii) be used to make another product that will

yield a profit contribution of Br. 250,000 per year. Should the company purchase them from

the outside supplier?