Golden Company Makes 3,000 Units Per Year of a Part

question 49

Essay

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:
$\begin{array} { | l | c | } \hline \text { Direct Materials } & \$ 35 \\\hline \text { Direct Labour } & \$ 10 \\\hline \text { Variable Manulacturing Overhead } & \$ 8 \\\hline \text { Fixed Manufacturing Overhead } & \$ 20 \\\hline \text { Total Manufacturing Cost per Unit } & \$ 73 \\\hline\end{array}$ 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 labour is a variable cost.
Required:
A. 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 centre be closed? Show calculations to support your answer.
B. 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?

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Definitions:

Negotiable Instrument

A document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer named on the document.

Maturity Value

The total amount that will be paid to an investor at the end of a bond's term or the face value plus any interest.

Note Receivable

A written promise for amounts to be received by a debtor, acknowledging a debt to be paid to the creditor at a future date.

Maturity Date

The specific date on which the principal amount of a bond, loan, or other financial instrument is due to be paid in full.