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Calculate total effect on income if it accepts this offer

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Reference no: EM133534119

Case Study: Hood Ltd. currently manufactures Part ABBA which is used in many of its products. It is currently producing 35,000 units of ABBA. The cost per unit to manufacture is currently as detailed below:

           Per unit 
 Direct materials          $       6.00 
 Direct labour                   2.00 
 Variable overhead                   1.50 
 Fixed overhead                   3.00 
    Total cost per unit      12.50 

Of the total fixed overhead applied to ABBA, $77,000 relates to salaries of supervisory personnel who would be terminated if the company decides to outsource this product. The remaining fixed overhead is allocated based on square footage utilized.

An outside supplier, Jones Inc., has contacted the company and has agreed to supply this part at $11 per unit. They are prepared to sign a long-term contract at $12 per unit.

Question: What are:

  1. Should Hood accept this offer to purchase this part at $12 assuming that there is no other use for the factory space? Calculate the total effect on income if it accepts this offer.
  2. Would your answer change if Hood could rent the plant space currently used to produce ABBA for $35,000 per year? Explain and show calculations.

Reference no: EM133534119

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