The management of James Industries has been evaluating whether the company should

continue manufacturing a component or buy it from an outside supplier. A R200 cost per

component has been determined as follows:

R

Direct materials 15

Direct labour 40

Variable manufacturing overhead 10

Fixed manufacturing overhead 35

Total 100

James Industries uses 4000 components per year. After Light SA has submitted a bid of R80

per component, some members of management feet they could reduce costs by buying from

outside and discontinuing production of the component. If the component is obtained from

Light SA, James's unused production facilities could be leased to another company for

R50 000 per year.

Required:

a. Determine the maximum amount per unit James should pay an outside supplier.

b. Indicate whether the company should make or buy the component and the total

monetary difference in favour of that alternative.

c. Assume the company could eliminate production supervisors with salaries totalling

R30 000 if the component were purchased from an outside supplier. Indicate whether

the company should make or buy the component and the total monetary difference in

favour of that alternative.