Refer to the information for Blasingham Company above. Of the total fixed overhead assigned to Q108, $ 77,000 is direct fixed overhead (the lease of production machinery and salary of a production line supervisor—neither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for $ 11. There is no alternative use for the facilities currently used to produce the part.
Blasingham Company is currently manufacturing Part Q108, producing 35,000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows:
Direct materials ........... $ 6.00
Direct labor ............2.00
Variable overhead .........1.50
Fixed overhead ..........3.50
Total.............. $ 13.00
Required:
1. Conceptual Connection: Should Blasingham make or buy Part Q108?
2. What is the most that Blasingham would be willing to pay an outside supplier?
3. If Blasingham buys the part, by how much will income increase or decrease?