Reference no: EM133144440

Question - For many years, a company has manufactured a small electrical part that it uses in the manufacture of its standard model diesel tractor. At a volume of activity of 60,000 units per year, the unit cost of production of this part is calculated as follows:

An external supplier offers the company to sell him this electrical component at only $10 per unit. One-third of the specific fixed overhead is made up of foreman salaries and other costs that can be eliminated if the part is purchased. The other two-thirds of the specific fixed manufacturing overhead consists of the depreciation of the material used, which has no resale value. The decision to purchase the part in question from an outside supplier would have no effect on the company's common manufacturing overhead, and the space currently used for this production could be leased at $80,000 per month year.

1) Should the company buy the part from the external supplier? Show the calculations to determine how much the company's profits would decrease or increase if it decided to purchase the component rather than manufacture it itself.

2) Support your decision with two qualitative considerations.