Canucks Company Ltd. currently produces 8,000 units per year of SK300 (Skates), which is a component of the companys major products. SK300 has the following unit costs.

Direct materials $ 35.50

Direct labour 20.00

Indirect costs:

Indirect labour (variable) 7.75

Heat and power (variable) 2.25

Fixed overhead 38.50

Total cost per unit $104.00

Canucks Company Ltd. expect future annual demand for SK300 to increase to 11,000 units starting next year, which is the present capacity. A supplier has offered to supply 11,000 units of SK300 at $89 per unit. If Canucks decided to purchase the required SK300, they could avoid fixed costs of $9.50 per unit based on their current production of 8,000 units per year.

1. Should Canucks Company Ltd. subcontract the production of SK300? (Accept offer from the supplier or not) Show calculations. (8 marks)

2. Assume that Canucks Company Ltd. could rent out the vacant area resulting from discontinuing production of SK300 for $225,000 per year.

Does this change the decision you made in (1) above?

Explain your rationale. (3 marks)

3. Explain any two qualitative factors that would also be relevant to the decision to make or buy SK300. (4 marks)