Royal Company manufactures 10,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows:

An outside supplier has offered to sell 10,000 units of Part R-3 each year to Royal Company for $54 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 $15 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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Direct materials.. Direct labour. $14.40 21.00 Variable manufacturing overhead Fixed manufacturing overhead . Total cost per part . . 9.60 ... 25.00 $70.00