Golden Reed Company is considering outsourcing one its parts. Golden requires 30,000 of the parts per year. The part has the following costs.
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Direct materials
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$1.00
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Direct labor
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$2.00
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Fixed manufacturing overhead
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$3.50
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Unit product cost
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$6.50
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An outside supplier has offered to make the part for $6.00. The fixed manufacturing overhead that is avoidable is $3.00.
a. How much of the unit product cost is relevant to the decision to make or buy the part?
b. Should Golden accept the offer? Explain your answer.
c. Upon further investigation Golden found that they could rent the facility used to make the part for $15,000 per year. How will this new information affect the decision to make or buy the part?