Company Ltd. currently produces 8,000 units per year of SR15 (Shoe Racks), which is a

component of the company's major products. SR15 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

Company Ltd. expect future annual demand for SR15 to increase to 11,000 units starting

next year, which is the present capacity. A supplier has offered to supply 11,000 units of SR15 at $89

per unit. If company decided to purchase the required SR15, they could avoid fixed costs of $9.50 per

unit based on their current production of 8,000 units per year.

REQUIRED:

1. Should Company Ltd. subcontract the production of SR15? Show calculations.

2. Assume that Company Ltd. could rent out the vacant area resulting from

discontinuing production of SR15 for $225,000 per year. Does this change the decision you made in (1) above? Explain your rationale.

3. Explain any two qualitative factors that would also be relevant to the decision to make or buy SR15.