Problem 23-1B Make or buy P1

Alto Company currently pays an outside supplier $4.50 per unit for a part for one of its products. Alto is considering two alternative methods of making the part. Method 1 of making the part would require direct materials of $1.20 per unit, direct labor of $1.50 per unit, and incremental overhead of $2 per unit. Method 2 of making the part would require direct materials of $1.20 per unit, direct labor of $1 per unit, and incremental overhead of $2.75 per unit.

Required

1. Compute the cost per unit for each alternative method of making the part.

2. Should Alto make or buy the part? If Alto makes the part, which production method should it use?