Victory Electronics makes a part used in the manufacture of desktop computers. Management is considering whether to continue manufacturing the part, or to buy the part from an outside source at a cost of $27.00 per part. Victory Electronics needs 80,000 parts per year. The cost of manufacturing 80,000 parts is computed as follows:
| Variable manufacturing overhead | 525,000 |
| Fixed manufacturing overhead | 650,000 |
| Total manufacturing costs | $2,525,000 |
If Victory Electronics buys the part, it would pay $.40 per unit to transport the parts to its manufacturing plant. Purchasing the part from an outside source would enable the company to avoid 40% of fixed manufacturing overhead costs. Victory Electronics's factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $65,000.
Prepare an analysis to show which alternative makes the best use of Victory Electronics's factory space:
| 2. | Buy the part and leave facilities idle. |
| 3. | Buy the part and use facilities to make another product. |
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