Spectra, Inc., produces semiconductors of which part no. 200 is a subassembly. Spectra, Inc., currently produces part no. 200 in its own shop. The Alta Company offers to supply it at a cost of $200 per 500 units. An analysis of the costs Spectra incurs producing part no. 200 reveals the following information:

Cost per 500 Units

Direct (Variable) Material .................................................................. $80

Direct (Variable) Labor ........................................................................ 90

Other Variable Costs ............................................................................ 25

Fixed Costs a .......................................................................................... 50

Total ................................................................................................... $245

aFixed overhead comprises largely depreciation on general-purpose equipment and factory buildings.

Management of Spectra, Inc., needs your advice in answering the following questions:

a. Should Spectra, Inc., accept the offer from Alta if Spectra’s plant is operating well below capacity?

b. Should the offer be accepted if Alta reduces the price to $180 per 500 units?

c. Suppose Spectra can find other profitable uses for the facilities it now uses in turning out part no. 200. How would that fact affect the price Spectra is willing to pay Alta?