Reference no: EM133065742

Question - Cat Company makes 10,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct Materials $13.10

Direct Labour $23.80

Variable Manufacturing Overhead $3.70

Fixed Manufacturing Overhead $22.50

Unit Product Cost $63.10

An outside supplier has offered to sell the company all the parts that Cat needs for $55 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional segment margin on this other product would be $164,000 per year. If the part were purchased from the outside supplier, $18.90 of the fixed manufacturing overhead cost being applied to the part would continue.

Required -

1. Should Cat Company make the product or purchase it from the outside supplier?

2. What is the decision rule for this type of scenario?