Acorn Ltd has been manufacturing its own shades for its camping chairs. The company is currently operating at 100 per cent capacity. Variable manufacturing overhead is charged to production at the rate of 50 per cent of direct labour cost. The direct materials and direct labour cost per unit to make the chair shades are $4 and $6, respectively. Normal production is 50 000 chair shades per year. A supplier has offered to make the shades at a price of $13.60 per unit. If Acorn Ltd accepts the supplier's offer, all variable manufacturing costs will be avoided, but $40 000 of fixed manufacturing overhead currently being charged to the chair shades will be unavoidable.
Required:
a. Should Acorn Ltd accept the supplier's offer to supply the chair shades?
b. Would your answer to (a) be different if the productive capacity released by not making the chair shades could be used to produce profit of $35 000?