QUESTION 5 20 marks

Junior Company currently buys 30,000 units of a part used to manufacture its product at R40 per unit. Recently the supplier informed Junior Company that a 20% increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units):

Direct materials R16

Direct labour 12

Variable overhead 12

Fixed overhead 10

Total R50

If the units are purchased from the supplier, R200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for R20,000 per year if the parts are purchased externally.

Required:

Should Junior Company buy the part externally or make it internally?