Question - Wildcat Company currently buys 50,000 units of a part used to manufacture its product at $100. Recently the supplier informed Wildcat Company that a 25 percent increase will take effect next year. Wildcat has some additional space and could produce the units for the following per-unit cost (based on 50,000 units):
Direct materials - $40
Direct labor - 34
Variable overhead - 30
Fixed overhead - 26
Total - 130
If the units are purchased from the supplier, $375,000 of fixed costs will continue to be incurred.
Required:
a. Should Wildcat Company buy the parts externally or make them internally? Support your answer with numerical analysis.
b. Should Wildcat Company buy the parts externally or make them internally, assuming that the plant can be rented for $350,000 per year when the parts are purchased externally? Support your answer with numerical analysis.