Paller Metal Products uses activity-based costing and currently manufactures Compo- nent X for use in one of its products. Ople Company has approached the president of Paller with an offer to sell Component X to Paller at a price of $14 per unit for all the units that Paller needs in production. The units would be sold on credit (terms 2/10, n/30) to Paller and would be shipped from Ople’s factory FOB shipping point, with the shipping costs being $0.75 per unit. The president sends you (the factory accountant) an e-mail that says:

| want to know whether or not to accept this offer. | have started to an- alyze our costs and have developed, based on our cost records, the fol- lowing schedule for Component X (CompX). | don’t know much about activity-based costing, so | didn’t fill in the cost for the variable factory overhead.

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Under its activity-based costing system, Paller allocates its variable factory overhead to activity pools. CompX goes through three of these activity pools. Paller’s cost records indicate that the average driver units for CompX in each activity pool and the rate per driver unit are as follows:
Average Driver Rate per Units per Driver Activity Pool/Cost Driver CompX Unit Direct labor related/Direct labor hours (DLH) 1.00 DLH $0.50/DLH Setup related/Number of setups (SU) 0.80 SU $0.35/SU Inspection related/Number of inspections (IN) 0.35 IN $0.60/IN You determine that Paller’s total fixed factory overhead costs will not change if it discontinues manufacturing CompX. , Required: Prepare a memo to the president in response to his e-mail.’ LKY-1