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

question 87

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:

Free Cash Flow

The amount of cash generated by a business after accounting for capital expenditures needed to maintain or expand the asset base.

Common Stock

A type of security that represents ownership in a corporation, entitling the shareholder to a proportion of the corporation's assets and profits.

Depreciation

The systematic allocation of the cost of an asset over its useful life.

Net Income

The total revenue of a company minus its expenses, taxes, and the cost of goods sold, indicating the company's profit.