Hi-Performance, Inc. produces a fuel additive that increases engine horsepower. Chemical ZYX3 is an ingredient of the fuel additive. Hi-Performance currently produces Chemical ZYX3 in its own factory. Additives-R-Us has offered to supply Chemical ZYX3 at a price of $20 per gallon. Hi-Performance uses 100,000 gallons each year in its production process. An analysis of the costs that Hi-Performance incurs producing Chemical ZYX3 is as provided below.

Direct materials	$ 10.00
Direct labor	$ 5.00
Other variable costs	$ 2.50
Fixed costs	$ 5.00
Total	$ 22.50
Total fixed costs	$5,000,000
Purchase price per gallon	$20.00
Quantity needed (gallons)	100,000

Hi-Performance incurs $5 million of fixed costs each year.

1. What is the effect on profits of accepting the offer from Additives-R-Us?

2. What is the effect on profits of accepting an offer from Additives-R-Us to supply Chemical ZYX3 at a price of $16 per gallon? 3. If Hi-Performance could avoid $400,000 of fixed costs by accepting the offer, what is the effect on Hi-Performance's profit if it accepts the offer of $20.00 per gallon?