Baxter Doors Company currently produces the doorknobs for the doors it makes and sells. The monthly cost of producing 5,000 doorknobs is as follows:
Unit-level materials.................................$16,000
Unit-level labor.......................................30,000
Unit-level overhead....................................4,000
Product-level costs*.................................32,000
Allocated facility-level costs........................20,000
*Twenty percent of these costs can be avoided if the doorknobs are purchased.
Wells Company has offered to sell comparable doorknobs to Baxter for $15.20 each.
Required
a. Should Baxter continue to make the doorknobs? Support your answer with appropriate computations.
b. For $24,000 per month, Baxter could lease the manufacturing space to another company. Would this potential cash inflow affect your response to Requirement a? Explain.