Each year, Basu Company produces units of a component used in microwave ovens. An outside supplier has offered to supply the part for $ The unit cost is:

Direct materials $

Direct labor

Variable overhead

Fixed overhead

Total unit cost $

Required:

What are the alternatives for Basu Company?

Make the part in house or buy the part externally

Assume that none of the fixed cost is avoidable. List the relevant costs of internal production.

Direct materials, direct labor and fixed overhead

List the relevant costs of external purchase.

Purchase price

Which alternative is more cost effective and by how much?

Making the part in house

by $

What if $ of fixed overhead is rental of equipment used only in production of the component that can be avoided if the component is purchased? Which alternative is more cost effective and by how much?

Buying the part from the external supplier

by $