Williamson Company, a furniture manufacturer, produces 10 000 units of Product X-100 each year for use in its production line. The costs per unit for Product X-100 are as follows:
Direct materials: $4.60 Direct labour: $7.10 Variable overhead: $3.30 Fixed overhead: $10.00.
Norejects Ltd, an overseas supplier, has offered to produce and sell to Williamson 10 000 units of Product X-100 for $25.50 each, stating that their products are of much better quality. If the offer is accepted, the facilities currently being used to make Product X-100 could be rented to another business at an annual rent of $40 000. In addition, $6 per unit of the fixed overhead being allocated to Product X-100 would be completely eliminated.
Required:
a Prepare a report to management showing computations of the net dollar advantage of outsourcing the production of X-100 to Norejects Ltd at the quoted price and recommending whether to proceed or not.
b If Norejects reduces the price to $22.00 for a lower quality product, would that change the decision recommended in your report in part (a)?