BGQ makes an electronic element in-house that is used in the water heater produced by the company. The following describes the cost of making one unit in-house:

Direct materials $70

Direct labour $50

Variable overhead $60

Fixed overhead per unit $60

Materials handling $0.1 per dollar of direct materials cost

The company currently makes 1,600 units of the component. An outside component manufacturer has offered to supply the component to Assured Product at a price of $185 per unit inclusive of all purchasing costs.

Required

a. Determine whether the component should be purchased from the outside supplier. Assume that Assured Product has no alternative use for its idle capacity. (4 marks)

b. Describe one reason to explain how an outside component supplier is able to sell the component for the price of $185 per unit, given Assured Products own cost to manufacture this component. (1 mark)