Answer:
The correct answer is It should buy this component from the outside supplier.
Explanation:
Currently Manufacturing Variable Cost = Manufacturing Units × Variable Cost Per Unit
= 40,000 × $1.95 = $78,000
Fixed cost to making this component = $65,000
Cost To Buying this Component from a Supplier = Buying Cost from a Supplier Per Unit × Buying Unit
= 40,000 × $3.50 = $140,00
0
Total cost of Making the Unit = Variable Cost + Fixed Cost
= $78,000 + $65,000 = $143,000
Total cost Buying the Unit = $140,000
According to the Analysis, the cost of buying unit is less than the cost of making the units. So unit should be buy from the outsider.
