Reference no: EM132776043

Question - Elves Inc. makes 24,000 units per year of a part called an axial tap for use in one of its toys. Data concerning the unit production costs of the axial tap follow:

Direct Materials $15

Direct Labour 6

Variable Manufacturing Overhead 3

Fixed Manufacturing Overhead ($4 general company overhead, $2 depreciation, and $3 direct supervision) 9

Total Cost per unit 33

An outside supplier has offered to sell Elves Inc. all of the axial taps it requires.

Required -

1. Assume Elves Inc. has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $29 each, should Elves Inc. accept the offer? Support your answer with appropriate calculations.

2. Assume that Elves Inc. could use the facilities presently devoted to production of the axial taps to expand production of another toy part that would yield an additional contribution margin of $95,000 annually. Should Elves Inc. accept the offer?