For many years, Meyers Inc. has produced a small electrical part that it uses in the production of its standard line of diesel tractors. The companys unit product cost for the part, based on a production level of 80,000 parts per year, is as follows:

Per Part Total

Direct materials $8.00

Direct labor 5.00

Variable manufacturing overhead 2.00

Fixed manufacturing overhead, traceable 5.00 $400,000

Fixed manufacturing overhead, common

(allocated on the basis of labor-hours) 6.00 $480,000

Unit product cost $26.00

An outside supplier has offered to supply the electrical parts to Myers Inc. for only $18.00 per part. One-half of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other half of the traceable fixed manufacturing costs consists of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company. The space being used to produce the parts could otherwise be used to generate incremental revenue of $1,000,000 and incremental costs of $800,000.

Required:

1. Prepare computations showing how much profits would increase or decrease because of purchasing the parts from the outside supplier rather than making them inside the company.
2. Explain why you would or would not accept the offer.