Reference no: EM132827761

Each year, Mother Company purchases 8,000 units of a part that it needs for production of its product. The supplier notified Blue Company that a price increase will take effect shortly, which will bring the price of the part to $25 per part. Blue Company is considering the use of idle facilities to produce the part.

The annual production costs to produce the needed 8,000 parts are as follows:

Direct materials $17,500
Direct labor 30,000
Indirect production costs variable 14,000
Indirect production costs fixed 33,500

The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect production costs are avoidable.

Required:

Problem 1: Determine if Blue Company should buy the part or produce it internally.