Problem 2

Junior Company currently buys 40,000 units of a part used to manufacture its product at $30 per unit. Recently the supplier informed Junior Company that a 25% increase in price will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 40,000 units):

Direct materials	$18
Direct labor	12
Variable overhead	12
Fixed overhead	13
Total	$55

If the units are purchased from the supplier, $230,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $40,000 per year if the parts are purchased externally.

Required:

Should Junior Company buy the part externally or make it internally (show computations)?