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

question 5

Essay

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

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Definitions:

Heritability

A measure of how much of the variation in a trait within a population can be attributed to genetic differences among individuals.

Intelligence

The capacity for learning, understanding, problem-solving, and adapting to new situations, often measured through various tests and criteria.

Proven

Demonstrated to be true or established as a fact through evidence or experimentation.

Terror Management Theory

A psychological concept suggesting that humans protect themselves from the fear of their own mortality through cultural beliefs and values.