Makeor"Outsource"Decision.

America ChavezCEO of America, Incwants to know. They manufacture Dimensional Portals Should they 1) buy Valve #78ban important part for their best- selling Portalfrom an outside supplier .... or should they 2) purchase new equipment and make that part in their own factory. The firm also has old manufacturing equipment that might be used to produce the assembly, but the that equipment is worn out, with no resalevalue.Theoutsourcepricefortheelectronicassemblyis$21.Belowisanestimate of the per-unit cost of making the item, as provided by the firm's production engineer:

AllocationofFactoryRent	$2
DepreciationExpenseforoldequipment	7
VariableOverhead	1
AllocationofOfficerSalaries	5
Supervision	1
DepreciationExpensefornewequipment	5
DirectMaterials	6
DirectLabor	3

The$7depreciationisalsoper-unit,but isfortheold equipmentthefirmalreadyowns. A factory supervisor would need to be hired if America Chavez is going to make the part.

General company overhead consists of costs such as CEO compensation. The $5 depreciation has been calculated on a per-unit basis, and as stated above, this is depreciation expenseforequipmentthefirmwouldhavetopurchaseinorderto makethe electronic assembly.

Required:

ShouldAmericaChavezmakethepartorbuyitfromanoutsidesupplier?Dosaywhy.