Company A produces and sells two products, X and Y. The company is currently operating at full capacity: 3,000 units of X and 2,000 units of Y per year as follows:

	Product X	Product Y	Total
Sales revenue	$ 450,000	$160,000	$610,000
Less
Variable expenses	(180,000)	(130,000)	(310,000)
Fixed expenses*	(139,000)	(91,000)	(230,000)
Profit/(loss)	$131,000	($61,000)	$70,000

* Direct fixed expenses incurred specifically for X and Y are $25,000 and $15,000 respectively.

Required: (Round off your answers to two decimal places.)

(a) Product X uses a component which is currently bought from an outside supplier for $15 per unit. The management is considering to make the component internally. The per unit cost of this component includes $2.00 of direct materials; $3.00 of direct labour and $1.40 of variable overheads. Two alternatives are considered as follows:

Alternative 1: Lease additional factory space and production equipment for $2,000 per month.No other change is expected for the existing fixed expenses.

Alternative 2: Management plans to drop Product Y as it is currently making a loss. The equipment used in the production of Product Y could be modified for $5,000 to produce the components instead.

Advise Company A if they should make or buy the component with supporting computations.

(b)Suppose an overseas customer placed a special order for 800 units of Product Y at 10% off the original selling price. If the special order is accepted,

• Company A must give up production and sales of 50 units of Product X.
• Variable selling expenses of Product Y may decrease by $5 per unit.

Advise Company A if the special order should be accepted with supporting computations.