Novak Ltd. manufactures carburetors as well as other parts that go into commercial engines in the same factory. An outside supplier has offered to produce and sell one type of carburetor to Novak Ltd. for a cost of $35 per unit. To evaluate this offer, Novak Ltd. has gathered the following information relating to its own cost of producing this carburetor internally:

Per20,000 Units

Unit per Year

Direct materials (variable) $15$300,000

Direct labor (variable)8 160,000

Variable manufacturing overhead480,000

Fixed manufacturing overhead (FMOH), traceable6*120,000

Fixed manufacturing overhead (FMOH), allocated9** 180,000

Fixed selling costs, allocated360,000

Total cost$44$900,000

*One-third of the traceable FMOH is supervisory salaries, a step cost. One supervisor is required for 20,000 units. The one supervisor now employed can be laid off if product is outsourced. The remainder of the traceable FMOH represents depreciation of special equipment. This equipment has no resale value and will be retained even if the product is outsourced.

** Allocated FMOH and selling costs are corporate-level costs. The outsourcing decision is not expected to affect the total outflow on these accounts, over the decision's horizon.

REQUIRED (Each of the following parts is independent of the other parts.)

1.Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. Answer the following questions:

If the offer from the outside supplier for the 20,000 carburetors is accepted and in-house production is discontinued, the profit will increase or decrease by ________________ (show decrease as a negative number)

Should the company accept the outside offer or continue producing in-house? (Yes/No)

2.What is minimum volume level of carburetors above which Novak Ltd. will prefer to make carburetors in-house over outsourcing them to the supplier making the offer?