A company makes a special type of items. The unit cost of making this component is as follows:

Cost per Unit (R)

Direct materials 6

Direct labour	4
Variable overhead	1
Supervisory costs	3
Equipment depreciation	2
Allocated general overhead	5
Total unit cost	21

The equipment used to manufacture the component has no resale value. General overhead is allocated on the basis of direct labour hours. The R21 total unit cost is based on 20,000 components produced each year. An outside supplier has offered to provide the 20,000 components at a cost of R13.50 per unit.

Required:

4.1 Advise the company on whether it should accept the offer of the outside supplier or not by preparing an analysis of the costs. (10)

4.2 The easiest way to distinguish between relevant & irrelevant costs is by cost behaviour; variable costs are relevant costs & fixed costs are not. Explain briefly why you might agree or disagree with this statement.(5)