Question 6 Lemon Electric produces insulators for use in high-voltage applications. The company's normal production volume is 3.000 per month. The maximum production capacity is 4,000 insulators per month. The current selling price per insulator is S630. The cost per unit of manufacturing and marketing the insulators at the normal volume is shown below: Manufacturing costs (S) Direct materials Direct labour Variable overhead Fixed uvertiead 80 100 20 100 300 Marketing costs Variable Fixed 30 70 100 S400 Total unit cost Required Consider the following parts independent a An outside contractor is willing to supply 1.500 insulators at a price of $250 per unit. If the offer is accepted, the company will make 1.300 insulators in-house and buy 1.500 insulators from the contractor. The company's fixed manufacturing costs will decline by 15%. Variable marketing costs will decline by 20%. Finally, acceptance of the offer would mean that a capital improvement project that is expected to increase fixed marketing costs by 15% would be unnecessary. Determine whether the contractor's offer should be accepted. U 8 b. The municipality of Q'Apple wishes to purchase 600 insulators during the month of June. The municipality is willing to pay a fixed fee of $270.000 and will reimburse Lemon Electric for all variable manufacturing costs incurred on behalf of the municipality in making 600 insulators. June is the busiest month for the company and there are sufficient orders from customers to fully utilize the production capacity of 4.000 insulators. There will be no variable marketing costs on the government contract. i) Determine whether the municipality's contract should be accepted. Provide all supporting calculations. ii) The president wants to renegotiate the terms of the contract. She is proposing that the municipality should reimburse the company for all of the manufacturing costs, to which the municipality has responded that it will agree only if the fixed fee is reduced to $240,000. Explain whether this is a good deal for the company