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Potter Company is vertically integrated and currently produces a part that it uses to manufacture one of its products. The unit manufacturing costs of this
Potter Company is vertically integrated and currently produces a part that it uses to manufacture one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows: Direct Materials $3 Direct Labor $ 5 Variable Manufacturing Overhead $4 Fixed Manufacturing Overhead $ 2 Total Cost $14 The Fixed overhead costs are unavoidable. 1.) Elmo Industries has offered to sell 5,000 units of the same part to Potter for $13 per unit. Assuming Potter has no other use for its facilities what should Potter do? 2.) Assume Potter can purchase 5,000 units of the part from Coyne for $15 each and the facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year. What should Potter do? 3.) Assume Potter can purchase 5,000 units of the part from Campigotto Company for $14 each, and the facilities currently used to manufacture the part could be used to manufacture 5,000 units of another product that would contribute $5.00 per unit to fixed costs. If no additional fixed costs would be incurred, what should Potter do? What are the incremental cash flows
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