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Question - Dog Company makes 2,000 units per year of a part 5C for use in one of its products. Data concerning the unit production costs of the part follow:
Direct Materials $36
Direct Labour $10
Variable Manufacturing Overhead $5
Fixed Manufacturing Overhead $16
Total Manufacturing Cost per Unit $67
An outside supplier has offered to sell Dog Company all of the part 5Cs that it requires for $70 per unit. If Dog Company decided to discontinue making the part 5Cs, 30% of the above fixed manufacturing overhead costs could be avoided.
Required - Assume that Dog Company could use the facilities presently devoted to production of the part 5Cs to expand production of another product that would yield an additional contribution margin of $50,000 annually. Should Dog Company continue to make part 5C or purchase from the outside supplier?
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