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# Royal Company manufactures 20000 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

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 27 2020 View more View Less