Junior Company currently buys 30,000 units of a part used to manufacture its product at £40 per unit. Recently the supplier informed Junior Company that a 20 per cent increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): If the units are purchased from the supplier, £200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for £20,000 per year if the parts are purchased externally.
Required:
Should Junior Company buy the part externally or make it internally?

Question

Junior Company currently buys 30,000 units of a part used to manufacture its product at £40 per unit. Recently the supplier informed Junior Company that a 20 per cent increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units):  If the units are purchased from the supplier, £200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for £20,000 per year if the parts are purchased externally.
Required:
Should Junior Company buy the part externally or make it internally?

Quizplus · Accepted Answer

The Answer of Junior Company currently buys 30,000 units of a part used to manufacture its product at £40 per unit. Recently the supplier informed Junior Company that a 20 per cent increase will take effect next year. Junior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units):  If the units are purchased from the supplier, £200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for £20,000 per year if the parts are purchased externally.
Required:
Should Junior Company buy the part externally or make it internally?

Junior Company Currently Buys 30,000 Units of a Part Used