Reference no: EM132959960
Question - Lincoln Steel Company produces automobile bumpers, sold for $90 per bumper. Cost data are as follows: Materials cost is $42.00, labor cost is $14.00, and allocated overhead is $26.25 per unit.
Each bumper includes one unit of mounting hardware. The mounting hardware has materials cost of $12 and labor cost of $1.60 (these numbers are included in the values provided earlier for the bumper as a whole). Each unit of the mounting hardware takes 0.20 machine hours (12 minutes) to make. All other work for the bumper (attaching the hardware and such) takes 1.55 machine hours (=1 hour 33 minutes) for a total of 1.75 machine hours (1 hour 45 minutes) per bumper including mounting hardware.
Lincoln allocates overhead based on labor cost and estimates that 2/3 of the allocated amount represents fixed manufacturing costs. Defining capacity in terms of machine hours, it estimates that it can make up to 155,000 bumpers per year (including making the mounting hardware).
Indiana automobiles has offered to supply as many units of mounting hardware as needed for $16 per unit.
Suppose that Lincoln is operating at a volume of 155,000 units per year and it can sell all the bumpers it makes. Thus, if it accepts the offer from Indiana Automobiles, it can use the freed-up capacity to make and sell additional bumpers. What is the profit impact of accepting the offer from Indiana?
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