Currently, Teddy Inc. manufactures part CD7 used in the production of its product, producing 8,000 units annually. An outside supplier is offering to sell the part to Teddy for RM16. The cost of manufacturing CD7 is as follows:

Direct Material $9.00

Direct Labour $3.00

Variable overhead $2.50

Fixed overhead $4.00

TOTAL: $18.50

Of the total overhead assigned to CD7, RM28,000 is direct fixed overhead (i.e. the amount is not needed if the product line is dropped). The remaining fixed overhead is common fixed overhead. There is no alternative use for facilities currently used to produce the part.

Required:

a. Should Teddy accept the offer from the outside supplier? What is the most that Teddy is willing to pay?

b. Can direct material ever be irrelevant in a make-or-buy decision?