Rama Corp makes machines used at golf courses. One of the parts in their machine is Part #G25 that they currently make at their factory. A supplier has offered to make all of their #G25 parts (4,000 per year) at a price of $26.50 each. Based on an accounting report, the cost for Manufacture the #G25 parts are:
Per Unit Production Cost
$1.80 Direct Materials
$7.80 Direct Labor
$7.90 Variable Overhead
$2.30 Supervisor's Salary
$6.90 Depreciation of Special Equipment
$6.60 Allocated General Equipment
$33.30 Total
The Special Equipment has no resale value or alternative use. The supervisor works on several projects. Also, if Rama doesn't make #G25, they can use the space and general equipment to increase production of another product, which is supervised by the current supervisor. That would increase the other product's contribution margin by $13,000.
1 How much will profits increase (decrease) next year if they choose to purchase #G25 from the supplier?
2 Should they purchase or manufacture #G25?