Reference no: EM132957557

Golden Company makes 3,000 units per year of a part called a "glup" for use in one of its products. Data concerning the unit production costs of glup follow:

Direct Materials                                 $35
Direct Labor                                       $10
Variable Manufacturing Overhead           $ 8
Fixed Manufacturing Overhead              $20
Total Manufacturing Cost per Unit            $73

An outside supplier has offered to sell Golden Company all the glups it requires. If Golden decided to discontinue making the glups, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.

REQUIRED:

Problem 1. Assume Golden Company has no alternative use for the facilities presently devoted to production of the glups. If the outside supplier offers to sell glups for $65 each, should Golden Company accept the offer? Should the center be closed? Show calculations to support your answer.

Problem 2. Assume that Golden Company could use the facilities presently devoted to production of glups to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum price Golden Company should be willing to pay the outside supplier for glups?