1. VM pistons a reliable supplier has offered to supply pistons units kf $4 per unit. because rhis price is less than the current average cost of $5 per unit. The VP of manufacuring is eager to accept this. On the basis of financial considerations alone shoild the outside offer be accepted. Show calculations.

2. How if at all would your respons to Q4 change if the company could use the vacated plant space for storage and in doinf so avoid $100 000 of outside storage charges currently incurred? Why is info relevant/irrelevant?

4-6 Caterpillar Engineering manufactures small engines. The engines are sold to manufacturers who install them in such products as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the pistons used in these engines. The pistons are currently manufactured in Division 4 of Caterpillar Engineering. The cost relating to the pistons over the past 12 months were as follows: Direct materials $400,000 Direct labour 300,000 Manufacturing overhead 800,000 Total $1,500,000 In 2017, Division 4 manufactured 300,000 pistons. The average cost for each piston was $5 ($1,500,000/300,000). Further analysis of manufacturing overhead revealed the following information. Of the manufacturing overhead, only 30% is considered variable. Of the fixed portion, $300,000 is an allocation of general overhead that will remain unchanged for the company as a whole if production of the pistons is discontinued. A further $200,000 of the fixed overhead is avoidable if production of the pistons is discontinued. The balance of the current fixed overhead, $60,000, is the division manager's salary. If production of the piston is discontinued, the manager of Division 4 will be transferred to Division 1 at the same salary. This move will allow the company to save the $80,000 salary that would otherwise be paid to attract an outsider to this position. It is expected manufacture of pistons in 2018 will total 350,000 units