Our company manufactures a component used in the production of its products. Our costs to manufacture the part include

• direct materials, $25 per unit;
• direct labor, $20 per unit;
• variable factory overhead, $15 per unit; and
• fixed manufacturing overhead, $12 per unit.

A supplier has offered to sell us the part for $65 per unit. If our company chooses to outsource, the fixed costs could be reduced by 55%. We would have no other use for the facilities currently employed in making the component. What would be the effect if our company decides to outsource?

We would save $1.60 per unit.

Costs would increase by $1.60 per unit.