Lee Company makes 5,000 units per year of a part called an axial tap for use in one of its products. Data

concerning the unit production costs of the axial tap follow:

An outside supplier has offered to sell Lee Company all of the axial taps it requires. If Lee Company decided to discontinue

making the axial taps, 50% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a

variable cost.

Required: PLEASE SHOW ALL OF YOUR CALCULATIONS FOR FULL MARKS.

a) Assume Lee Company has no alternative use for the facilities presently devoted to production of the axial

taps. If the outside supplier offers to sell the axial taps for $64 each, should Lee Company accept the offer? Fully support

your answer with appropriate calculations.

b) Assume that Lee Company could use the facilities presently devoted to production of the axial taps to expand

production of another product that would yield an additional contribution margin of $75,000 annually. What is the maximum

price Lee Company should be willing to pay the outside supplier for axial taps?

For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac).

$25 Direct Materials $15 Direct Labour $13 Variable Manufacturing Overhead $28 Fixed Manufacturing Overhead $81 Total Manufacturing Cost per Unit