Reference no: EM133067574

Question - Red Company makes 8,000 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 $13.70

Direct Labour $23.80

Variable Manufacturing Overhead $5.70

Fixed Manufacturing Overhead $27.50

Unit Product Cost $70.70

An outside supplier has offered to sell the company all the parts that Red needs for $72.30 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 $230,000 per year. If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $20.70 of the fixed manufacturing overhead cost being applied to the part would continue, even if the part were purchased from the outside supplier. Should Red Company make the product or purchase it from the outside supplier?