Question

Royal Company manufactures 20,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows:
Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.80
Direct labour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00
Variable manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.20
Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.00
Total cost per part. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.00
An outside supplier has offered to sell 20,000 units of Part R-3. An outside supplier has offered to sell 20,000 units of Part R-3 each year to Royal Company for $23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture Part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to Part R-3 would continue even if the part were purchased from the outside supplier.
Required:
Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.


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  • CreatedJuly 08, 2015
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