Parrot Enterprises manufactures one of the components used to assemble its main company product. Specialty Products, Inc.,
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Parrot Enterprises 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 $ per unit. Parrot Enterprises' current cost is $ per unit of the component, based on the components that
Parrot Enterprises currently produces.
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This current cost per unit is based on the following calculations:
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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 $ of contribution margin per year.
Requirements
If Parrot Enterprises outsources the manufacturing of the component, will
operating income increase or decrease? By how much?
What is the maximum price per unit Parrot Enterprises would be willing to pay
if it outsources the component?
Data table
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