Required: Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.
ABC Polymer manufacturers 30,000 units of Part D5 each year for use on its production line. At this level of activity the costs the cost per unit is as follows:
ABC Polymer manufacturers 30,000 units of Part D5 each year for use on its production line. At this level of activity the costs the cost per unit is as follows:
Per Unit of Product
Direct materials $3.60
Direct labor $10.00
Variable manufacturing
Fixed Manufacturing Overhead $9.00
Total Cost per Part $25.00
An outside supplier has offered to sell 30,000 units of Part D5 each year to Polymer for $22 per part. If Polymer accepts this offer the facilities now being used to manufacture Part D5 could be rented to another company at an annual rental of $60,000. However Polymer has determined that two-thirds of the fixed manufacturing overhead applied to Part D5 would continue even if Part D5 were purchased from an outside supplier.
Required:
Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.
Step by step
Solved in 3 steps
