19 Jan Royal Company manufactures 20,000 units of part R-
Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 follows:Direct materials . . . . . . . . . . . . . . . . . . . . . $ 4.80Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . 7.00Variable manufacturing overhead. . . . . . . . . 3.20Fixed manufacturing overhead. . . . . . . . . . . 10.00Total cost per part . . . . . . . . . . . . . . . . . . . . $25.00An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for $23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.Required:Prepare computations showing how much profits will increase or decrease if the outside supplier’s offer is accepted.
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