Koko Company manufactures 20,000 units of R-3 each year for use on its production line. At

this level of activity, the cost per unit for R-3 is:

Direct Materials $ 4.80

Direct Labor 7.00

Variable Manufacturing Overhead 3.20

Fixed Manufacturing Overhead 10.00

Total cost per part $ 25.00

An outside supplier has offered to sell 20,000 units of R-3 each year to Koko company for $23.50 per part. Koko company has determined that $6.00 of the fixed manufacturing overhead being applied to R-3 would continue if part R-3 were purchased from the outside supplier.

Should Koko accept the offer to purchase part R-3 from the outside supplier?

ANSWER __________________________

2. By how much will Koko be better or worse off (indicate better or worse) id the offer is accepted?

ANSWER __________________________