Overlander, Inc. manufactures and sells chemicals used by companies in the pharmaceutical industry. One of the special chemical compounds (i.e. an ingredient in their chemical products) used in developing their final chemical mix, called Xp7r, has a cost of production, per 100 gallons (which they call a batch), as follows:

Production Cost per batch to produce Xp7r
Liquid components of chemical	$270
Wages for chemical mixers	200
Variable manufacturing overhead	250
Fixed manufacturing overhead	400
Total	$1,120

Fixed manufacturing overhead represents allocation of various fixed costs related to the production process such as depreciation, supervisors salaries, and production plant administration costs.

In the current year, Overlander will use 20,000 gallons of Xpr7 in their production process.

Overlander has received an outsider suppliers bid to provide Overlander, Inc. with this special compound Xp7r. The suppliers total price for 20,000 gallons of Xp7r is $160,000.

Required

1. Based on the facts above, evaluate the outside suppliers offer and make a recommendation to Overlander, Inc., i.e. should they accept the offer. Please show your analysis in support of your recommendation.
2. After looking at your analysis, but before making their decision, Overlanders management examined their opportunities and related opportunity costs, if they allowed an outside supplier for Xp7r. Based on their analysis, if the accept the outside suppliers bid, they can:
   1. Shift the activities one supervisory job from Xpr7 to other in-house supervisory activities. The supervisors salary is $52,000
   2. Use the available excess production capabilities to produce a new product that will generate additional $90,000 of additional revenue. In considering the profitability of the new product, the company estimates the related costs to be:
      1. Direct material - $20,000
      2. Direct labor - $45,000,
      3. Manufacturing overhead - $35,000, (50% variable and 50% fixed. The fixed portion represents an allocation of existing overhead)

Based on the additional opportunity costs and benefits discussed in part B., evaluate the suppliers proposal taking into consideration the facts provided in B. above and make a recommendation to Overlander on whether they should accept the outside suppliers price. Please show your analysis in support of your recommendation.