XYZ Ltd manufactures 6,000 units of part c3 each year for use on its production line. At this level of activity, the cost per unit for part c3 is as follows:
Direct materials $3.60
Direct labour 10.00
Variable overhead 2.40
Fixed overhead 12.00
Total cost per part $28.00
An outside supplier has offered to sell 6,000 units of part c3 each year to XYZ Ltd for $24 per part. If Honeywell Ltd accepts this offer, the facilities now being used to manufacture part c3 could be rented to another company at an annual rental of $36,000. However, XYZ Ltd has determined that three-quarters of the fixed overhead being applied to part c3 would continue even if part c3 were purchased from the outside supplier.
a) Prepare an analysis to show the net dollar advantage or disadvantage of accepting the outside supplier's offer.
b) Suggest two other factors that the company might want to consider before making a decision. Explain why.