A potential supplier has approached AEMA Limited with a proposition. The supplier will sell 10,000 electronic components to AEMA for $4.75 per unit. The offer looks very tempting. AEMAs accountant advises that manufacturing the 10,000 components AEMA requires next year will cost $8.20 per unit. She argues accepting the potential suppliers offer will save AEMA $3.45 per unit (i.e. $8.20 - $4.75), which equates to $34,500 over the entire year (i.e. $3.45 x 10,000 units).

A breakdown of the accountants estimate of next years total and per unit cost to manufacture these components is shown below:

	Total cost		Cost per unit
Rental of equipment	$12,000		$1.20
Depreciation: Specialised machine	2,000		0.20
Direct materials	10,000		1.00
Direct labour	20,000		2.00
Variable overhead	8,000		0.80
Allocated fixed overhead	30,000		3.00
Total	$82,000		$8.20

Additional information

- AEMA rents most of the equipment used to manufacture the components under consideration at a cost of $12,000 per annum. AEMA can cancel these rental agreements at short notice with no penalty.

- AEMA does own one specialised machine used to manufacture the components under consideration. The machine currently has a carry value of $2,000. However, AEMA plans to scrap this machine if it accepts the potential suppliers offer. The machine has a scrap value of zero because there is no market for machinery of this type and it has no alternative use.

- AEMA recently purchased sufficient materials to manufacture 5,000 components. However, AEMA plans to scrap these materials too if it accepts the potential suppliers offer. There is no market for these materials and they have no alternative use.

- AEMA incurs variable manufacturing overhead at a rate of $0.40 per direct labour dollar.

- AEMAs factory imposes a total fixed manufacturing overhead equal to $1,000,000 per annum. AEMAs accountant allocates this $1,000,000 based on the amount of factory space occupied by each product AEMA manufactures. The manufacturing facilities used to manufacture the component under consideration occupy 6,000 of the factorys total 200,000 square metres. Thus, the fixed manufacturing overhead allocated to this component is 3 per cent of $1,000,000.

- AEMAs current manufacturing facilities are getting cramped and overcrowded. AEMAs need for space means it will not move into a smaller factory if it accepts the potential suppliers offer. In addition, AEMA will not put the 6,000 square metres freed up to an alternative use.

- The receiving department advises that AEMAs current receiving and inspecting crew are working at full capacity. The purchase of an additional 10,000 electronic components from an external supplier will require an additional part-time employee at an annual cost of $30,000.

Required: This Question has two parts - Part (a) and Part (b). Answer both parts

(a) Should AEMA accept the prospective suppliers offer or should it continue to manufacture the electronic component?

(Note: You should support your answer to this question with calculations that show the differential/relevant costs incurred next year under each alternative)

Part (b)

Identify and explain the qualitative and other relevant factors AEMA should consider before accepting or rejecting the potential suppliers offer.