Problem 4-57 (Algo) Comprehensive Differential Costing Problem (LO 4-1, 2, 4)

Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table.

Unit manufacturing costs
Variable materials	$	55
Variable labor		80
Variable overhead		30
Fixed overhead		65
Total unit manufacturing costs				$	230
Unit marketing costs
Variable		30
Fixed		75
Total unit marketing costs					105
Total unit costs				$	335

Unless otherwise stated, assume that no connection exists between the situation described in each question; each is independent. Unless otherwise stated, assume a regular selling price of $380 per unit. Ignore income taxes and other costs that are not mentioned in the table or in the question itself.

Required:

f-1. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Daviss customers as orders are received from Daviss sales force. Daviss fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. The idle facilities would be used to produce 1,600 modified stoves per month for use in extreme climates. These modified stoves could be sold for $455 each, while the costs of production would be $280 per unit variable manufacturing expense. Variable marketing costs would be $55 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 6,000 regular stoves were manufactured or the mix of 4,000 regular stoves plus 1,600 modified stoves were produced. What in-house unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $220.

f-2. Should the proposal be accepted for a price of $220 per unit to the outside contractor?