Unicorn Magic manufactures a part for use in its production of stuffed toys. When 10,000 items are produced, the costs per unit are:
- Direct materials $0.60
- Direct manufacturing labour 3.00
- Variable manufacturing overhead 1.20
- Fixed manufacturing overhead 1.60
- Total $6.40
Triike Company has offered to sell to Unicorn Magic 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Unicorn Magic accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:Which alternative (make or buy) is best for Unicorn Magic? Why?