Make or Buy a Component [LO3]

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 is:

Direct materials . . . . . . . . . . . . . . . . . . . . $ 4.80 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . 7.00 Variable manufacturing overhead . . . . . . . 3.20 Fixed manufacturing overhead . . . . . . . . . 10.00 Total cost per part . . . . . . . . . . . . . . . . . . . $25.00 An 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 i s a ccepted.