Jackson Engineering manufactures small engines. 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 starter assemblies used in the engines. The starter assemblies are currently manufactured in Division 3. The costs relating to the starter assemblies for the past 12months were as follows:

Direct materials$200,000

Direct labor$150,000

Manufacturing overhead$400,000

Division 3 manufactured 150,000 starter assemblies over the past year, but is uncertain about how many units it will produce in the future. The average cost for each starter assembly was $5 ($750,000 / 150,000).

Further analysis revealed the following: Of the total manufacturing overhead, only 25% is considered variable. Of the fixed portion, $150,000 is an allocation of general overhead that would remain unchanged for the company as a whole if production of the starter assemblies is discontinued. $100,000 of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, $50,000, is the division manager's salary. If production of the starter assemblies is discontinued, the manager of Division 3 will be transferred to Division 2 at the same salary. (The manager of Division 2 left the company recently.) This move will allow the company to save the $40,000 salary that would otherwise be paid to attract an outsider to this position.

Required:

1.A reliable supplier has offered to supply starter assembly units at $4 per unit. Because the price is lower than the current average cost of $5 per unit, the vice president of manufacturing is eager to accept this offer. On the basis of financial consideration alone, should the outside offer be accepted? Show your calculations. (Hint: Production output in the coming year may be different from production output in the last year.)

2.How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid $50,000 of outside storage charges currently incurred?