Every year Underwood Industries manufactures 15,000 units of part 231 for use in its production cycle. The

Question:

Every year Underwood Industries manufactures 15,000 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows:

Direct materials .................................................. $6

Direct labor ......................................................... 12

Variable manufacturing overhead ................... 10

Fixed manufacturing overhead ........................ 15

Total ................................................................... $43

Flintrock, Inc., has offered to sell 5,000 units of part 231 to Underwood for $40 per unit. If Underwood accepts Flintrock's offer, its freed-up facilities could be used to earn $10,000 in contribution margin by manufacturing part 240. In addition, Underwood would eliminate 75% of the fixed overhead applied to part 231.

Required

Should Underwood accept Flintrock's offer? Why or why not?

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...