Q1 (18 points) Quality Company currently makes as many units of widgets as they need. The company replaced its current machinery for widgets on Jan 1, 2019 with the plans of continuing to produce widgets in-house. However, the general manager, Arthur Wang, has received a bid from Widgets Inc who are willing to supply Quality Company's demand of 1,000 units at $60 apiece. Widgets Inc can start supplying on Jan 1, 2020 and continue supplying for five years, after which Quality Company will no longer need widgets. Widgets Inc can accommodate any fluctuations in Quality Company's demand for widgets at the same price. The controller for Quality Company has prepared the following pro-forma income statement (in $) for producing 1,000 units of widgets for the current year: Direct materials 26,400.00 Direct manufacturing labour 13,200.00 Variable manufacturing overhead 8,400.00 Depreciation on machine 12,000.00 Product and process engineering 4,800.00 Rent 2,400.00 Allocation of general plant overhead costs 6,000.00 Total costs 73,200.00 The following information is also available: The machine for widgets has no alternate use and was acquired by Quality Company for $72,000. The machine has a useful life of 6 years and zero terminal price. The company calculates depreciation on a straight-line basis. The company estimates that it can sell the machine at the end of 2019 for $24,000. Product and process engineering costs are fixed in the short-run with respect to the number of widgets produced, but the company can eliminate these costs if they stop producing the widget. Rent costs are allocated to widgets based on the floor space used for manufacturing the product. If the company stops producing widgets, this floor space will become available for storage and the company will be able to save $1,200 it currently spends on renting outside storage. General plant overhead costs are allocated to each department based on direct manufacturing labour dollars. These costs will not change. Quality Company operate with a required rate of return of 11% on all projects. (Ignore taxes for any decision-making and assume Fcash flow occur at the end of the year 1. Should Quality Company outsource widgets or continue producing it in-house? Provide a clear explanation for your answer supported by the relevant quantitative analysis. (10 points) 2. What other factors should Arthur Wang consider in making his decision? (3 points) 3. Arthur's bonus is based on Quality Company's accounting income. Assuming Arthur acts only in his own best interests, and not necessarily the company's, will that influence his decision to outsource or not? (5 points)