Reference no: EM132955678

Plummer Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow:

Direct Materials $35

Direct Labour $10

Variable Manufacturing Overhead $ 8

Fixed Manufacturing Overhead $20

Total Manufacturing Cost per Unit $73

An outside supplier has offered to sell Plummer Company all of the axial taps it requires. If Plummer Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided [think carefully as to what cost amount will ultimately have to be consider in the decision. Often a cost avoided means that under one decision option that is the cost to be factored in. Don't be thrown off by the terminology 'avoided']. Assume that direct labour is a variable cost.

Required:

Problem a) Assume Plummer Company 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 $65 each, should Plummer Company accept the offer? Fully support your answer with appropriate calculations.

Problem b) Assume that Plummer Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Plummer Company should be willing to pay the outside supplier for axial taps?