Reference no: EM132956453

Problem - Flounder Manufacturing makes recreational motor boats. The company currently manufactures all the components themselves but have been approached by an outside supplier to provide the motors for the boats. The outside supplier is offering to sell Flounder the motors for $120 each. The following is the cost information for producing the motors internally:

	Per unit	10,000 motors per year
Direct materials	$55.00	$550,000
Direct labour	$30.00	$300,000
Variable manufacturing overhead	$20.00	$200,000
Fixed manufacturing overhead	$20.00	$200,000
	$125.00	$1,250,000

The fixed manufacturing overhead are common cost that are allocated to the motors and are unavoidable if Flounder stops making the motors.

Required -

A) Assuming the company has no alternative use for the facilities now being used to produce the motors, should the outside supplier's offer be accepted? Show all calculations.

B) Suppose that if the motors were purchased, Flounder Manufacturing could use the freed capacity to launch a new product. The contribution margin of the new product is $200,000 per year. Should Flounder Manufacturing accept the offer to buy the motors from the outside supplier for $120 each. Show all calculations.