CopperHead is considering outsourcing the production of a security camera. The company has located a vendor who will produce and sell the component to CopperHead at a cost of $41 per unit. Initially, the area used for the production would be left idle if the component outsourced.

The following are the costs that CopperHead incurs in producing the component

Direct materials $27 per unit

Direct manufacturing labor $9 per unit

Variable manufacturing overhead $4 per unit

Fixed overhead $600,000 (25% is avoidable if production is outsourced)

CopperHead expects to sell 600,000 units next year at a price of $60 per unit. CopperHeads capacity is also 600,000 units. Ignore income taxes.

1. Should CopperHead outsource the production? Provide quantitative analysis supporting your answer

2. What is maximum price that CopperHead would be willing to pay for the component?

3. CopperHead believes that they would be able to sell 750,000 units at $60 per unit and the vendor indicated that they can provide up to 750,000 units next year. The company must either produce the component or outsource it (a combination of the two is not possible). How does this affect your answer to a above?

4. Assume that CopperHead can use the idle space to produce and sell another product Part Z if the production security camera is outsourced. Management estimates that 220,000 units of Part Z can be produced next year and then be sold for $10 per unit. The estimated costs to produce 220.000 units of Part Zare $1,839,000. How does thi affect your answer to a. above?