EXERCISE 12-16 Make or Buy a Component |L0201 Royal Company manufactures 10,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows: Direct materials $14.40 Direct labour 21.00 9.60 Variable manufacturing overhead Fixed manufacturing overhead 25.00 Total cost per part $70.00 An outside supplier has offered to sell 10,000 units of Part R-3 each year to Royal Company for $54 per part. If Royal Company accepts this offer, the facilities now being used to manufacture Part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $15 of the fixed manufacturing overhead being applied to Part R-3 would continue even if the part were purchased from the outside supplier. Required: Prepare computations showing how much profits will increase or decrease if the outside supplier's offer is accepted