« Spring is coming soon » Co. makes 40,000 units per year of a part called XX for use in one of its products. Data concerning the unit production costs of XX follow:
Direct materials $25
Direct labour $16
Variable manufacturing Overhead $9
Fixed manufacturing overhead $25
An outside supplier has offered to sell “Spring is coming soon” all of the parts it requires for $58 each. If the company decided to discontinue making the parts, 60% of the above fixed manufacturing overhead costs could not be avoided.
a) In deciding to accept or reject the offer from the outside supplier, what would be the relevant costs to consider in the decision? Compute the total of those costs.
b) Assume « Spring is coming soon » has no alternative use for the facilities presently devoted to production of the parts. Should the offer from the outside supplier be accepted? Why?
c) Assume the facilities presently devoted to production of the parts could be used to expand production of another product that would yield an additional contribution