QUESTION 3 (15 marks) Relevant Costing Langmuir Company Ltd. currently produces 8,000 units per year of SR15 (Shoe Racks), which is a component of the companys major products. SR15 has the following unit costs.

Direct materials $ 35.50

Direct labour 20.00

Indirect costs:

Indirect labour (variable) 7.75

Heat and power (variable) 2.25

Fixed overhead 38.50

Total cost per unit $104.00

Langmuir Company Ltd. expect future annual demand for SR15 to increase to 11,000 units starting next year, which is the present capacity. A supplier has offered to supply 11,000 units of SR15 at $89 per unit. If Langmuir decided to purchase the required SR15, they could avoid fixed costs of $9.50 per unit based on their current production of 8000 units per year.

1. Should Langmuir Company Ltd. subcontract the production of SR15? Show calculations. (8 marks)

2. Assume that Langmuir Company Ltd. could rent out the vacant area resulting from discontinuing production of SR15 for $225,000 per year. Does this change the decision you made in (1) above? Explain your rationale. (3 marks)

3. Explain any two qualitative factors that would also be relevant to the decision to make or buy SR15. (4 marks)