The Hyatt Company is trying to decide whether it should continue to make its sub-assemblies or if it should purchase them from an outside supplier for $9.00 each.Currently, 40,000 units per year are manufactured internally, with the following costs:

Direct Materials	$ 3.00
DirectLabour	$ 4.20
Variable Overhead	$ 0.60
Fixed Overhead*	$ 3.70
Total Manufacturing Cost per Unit	$ 11.50

* The fixed overhead cost consists of $0.80 for supervision**, $0.90 for taxes and $2.00 for rent.

** The supervisor position would be eliminated if the sub-assemblies were sourced outside.

Required:

1. need analysis of the two alternatives and make a recommendation. 14 Marks

1. Assume that Hyatt could use the facilities to expand production for another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Hyatt should be willing to pay the outside supplier for the sub-assemblies? 6 Marks