Prepare computations showing how much profits

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Reference no: EM131130064

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.

Reference no: EM131130064

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