Jackson Corporation makes bicycles. For many years, Jackson has made the rear wheel assembly for its bicycles. Recently, Lannister Company offered to sell these rear wheel assemblies to Jackson. If Jackson makes the assembly, its cost per rear wheel assembly is as follows:

Direct materials $4.00

Direct labor 16.00

Variable manufacturing overhead 8.00

Fixed manufacturing overhead, avoidable 3.00

Fixed manufacturing overhead, unavoidable

(allocated on the basis of labor-hours) 7.00

Unit product cost $38.00

These costs are based on an annual production of 30,000 units.

Lannister offered to sell the assembly to Jackson for $30.00 each. The total order would amount to 30,000 rear wheel assemblies per year, which Jacksons management will buy instead of making if the company can save at least $20,000 per year.

Required:

(a)Should Jackson make rear wheel assemblies or buy them from Lannister? Show computations.

(b) Discuss qualitative factors that might be considered in the decision-making process.