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EXERCISE 12 12 Make or Buy a Component LO3 Royal Company manufactures 20,000 units of part R-3 each year for use on its production line At this level of activity the cost per unit for part

EXERCISE 12–12 Make or Buy a Component [LO3]

Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:

 

 

Direct materials . . . . . . . . . . . . . . . . . . . .

$  4.80

Direct labor . . . . . . . . . . . . . . . . . . . . . . . .

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 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 part R-3 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.

Jun 28 2020 View more View Less

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