Kirsten Corporation Makes 100,000 Units Per Year of a Part

question 17

Essay

Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products. Data concerning the unit production costs of the B345 gasket follow:
An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:
a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations.
b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually. What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

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Definitions:

Interpreting Environment

Refers to the process of understanding and analyzing the surroundings or conditions in which an individual or organization operates.

Work-related Motivations

Factors that drive an individual's enthusiasm and commitment towards performing tasks and achieving goals in a professional setting.

Developmental Opportunities

Opportunities within an organization or environment that promote the growth, learning, or advancement of individuals.

Office Politics

The use of power, social networking, and other non-formal actions to gain advantage or influence decisions within an organization.