Each year, Foster Coproduces 45,000 units of a component to use in transcontinental blimps. An outside supplier has offered to supply the part for $4.05.

The unit cost is:

Direct Materials: $1.00

Direct Labor: $0.65 Variable

MOH: $1.25

Fixed MOH: $3.05

Overhead is applied on the basis of machine hours; the component requires 10,000 machine hours per year. If $12,000 of fixed overhead is rental of equipment used in production of this component and can be avoided if the component is purchased from the outside supplier.

Which alternative (make the part internally or purchase from the outside supplier) is more cost effective?