Question 1 Good-Hope-Heavy Company manufactures small turbines that it sells to manufacturers who install them in products such as Pelton wheels. The company currently manufactures all the parts used in these turbines but is considering a proposal from an external supplier who wishes to supply the paddles used in these turbines. The paddles are currently manufactured in Division 3 of Good-Hope-Heavy Company. The costs relating to the paddles for the past 12 months were as follows: Direct materials Variable direct manufacturing labor Manufacturing overhead Total $ 400,000 300,000 800,000 $1,500,000 Over the past year, Division 3 manufactured 150,000 paddles. The average cost for each paddle is $10 ($1,500,000 = 150,000). Further analysis of manufacturing overhead revealed the following information. Of the total manufacturing overhead, only 25% is considered variable. Of the fixed portion, $300,000 is an allocation of general overhead that will remain unchanged for the company as a whole if production of the paddles is discontinued. A further $200,000 of the fixed overhead is avoidable if production of the paddles is discontinued. The balance of the current fixed overhead is the division manager's salary. If Good-Hope-Heavy discontinues production of the paddles, the manager of Division 3 will be transferred to Division 2 at the same salary. This move will allow the company to save the $80,000 salary that would otherwise be paid to attract an outsider to this position. Required: (a) Hopeful Engineering, a reliable supplier, has offered to supply 150,000 paddles at $8 per unit. Because this price is less than the current average cost of $10 per unit, the vice president of Good-Hope-Heavy is eager to accept this offer. On the basis of financial considerations alone, should Good-Hope-Heavy buy from the supplier? Show your calculations. (7 marks) (b) Calculate the quantities of paddle that Good-Hope-Heavy will be indifferent between make and buy? When will it make and when will it buy? (11 marks)