Carlson Company Makes 4,000 Units Per Year of a Part

question 129

Essay

Carlson 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:
$\begin{array}{lr}\text { Direct materials } & \$ 35 \\\text { Direct labor } & 10 \\\text { Variable manufacturing overhead } & 8 \\\text { Fixed manufacturing overhead } & 20\\\text { Total manufacturing cost per unit }&\$73\end{array}$
An outside supplier has offered to sell Carlson Company all of the axial taps it requires. If Carlson Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor is a variable cost.
Required:
a. Assume Carlson 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 Carlson Company accept the offer? Fully support your answer with appropriate calculations.
b. Assume that Carlson 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 Carlson Company should be willing to pay the outside supplier for axial taps?

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Definitions:

Adjusting Entry

An accounting entry made at the end of an accounting period to allocate income and expenditure to the correct period.

Sales

The activities involved in selling goods or services in return for money or other compensation, fundamental to a company's revenue.

Gift Card Expense

The cost recognized by a business when gift cards are redeemed, typically involving the goods or services provided in exchange for the card.

Redeemed

A term referring to the process of exchanging a financial instrument, such as a bond or coupon, for cash or its equivalent value.