Parrot Enterprise manufactures one of the components used to assemble its main company product. Specialty Products, Inc., has offered to make the component at a cost of $12.60 per unit. Parrot Enterprises' current cost is $16.75 per unit of the component, based on the 85,000 components that Parrot Enterprises currently produces.

Requirements

1. If Parrot Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much?

2. What is the maximum price per unit Parrot Enterprises would be willing to pay if it outsources the component?

Data Table

Direct material per unit	$6.00
Direct labor per unit	7.25
Variable manufacturing overhead per unit	0.50
Fixed manufacturing overhead per unit	3.00
Total manufacturing costs per unit	$16.75

None of Parrot Enterprises' fixed costs will be eliminated if the component is outsourced. However, the freed capacity could be used to build a new product. This new product would be expected to generate $31,000 of contribution margin per year.