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

question 23

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: 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 labor 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:

Marginal Costs

The swelling of total charges resulting from generating an extra unit of a good or service.

Elasticity of Market Supply

An indicator of the extent to which the supply of a product varies following a price adjustment.

Marginal Cost Curves

A graphical representation that shows how the cost of producing one more unit of a good or service varies as production increases.

Market Supply Curve

A graphical representation showing the total quantity of a good or service that suppliers are willing and able to sell at different prices.