Royal Company manufactures 10,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows:

Direct materials	$14.40
Direct labour	21.00
Variable manufacturing overhead	9.60
Fixed manufacturing overhead	25.00
Total cost per part	$70.00

An outside supplier has offered to sell 10,000 units of Part R-3 each year to Royal Company for $54 per part. If Royal Company accepts this offer, the facilities now being used to manufacture Part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $15 of the fixed manufacturing overhead being applied to Part R-3 would continue even if the part were purchased from the outside supplier.

Required:

1. Prepare computations showing how much profits will increase or decrease if the outside suppliers offer is accepted.

Exercise 12-16 MAKE OR BUY COMPONENT The costs that are relevant in a make-or-buy decision are those costs that can be avoided as a result of purchasing from the outside. The analysis for this exercise is: Per Unit Differential Costs 10,000 Units Make Buy Make Buy Cost of purchasing. Cost of making: Direct materials... Direct labour..... Variable manufacturing overhead Fixed manufacturing overhead... Total cost.. * The remaining $. of fixed manufacturing overhead cost would not be relevant, since it will continue regardless of whether the company makes or buys the parts. The $150,000 rental value of the space being used to produce part R-3 represents an opportunity cost of continuing to produce the part internally. The $150,000 rental value of the space being used to produce part R-3 represents an opportunity cost of continuing to produce the part internally. Thus, the completed analysis would be: Make Buy Total cost, as above... Rental value of the space (opportunity cost).... Total cost, including opportunity cost. Net advantage in favour of buying ..... Profits would increase by $ accepted. if the outside supplier's offer is