Question 9.4 (Total: 18 marks)

Manoah Company makes 4,000 units per year of a part called an axial tap for use in one of its products. Data concerning the unit production costs of the axial tap follow:

Direct Materials	$35
Direct Labour	$10
Variable Manufacturing Overhead	$8
Fixed Manufacturing Overhead	$20
Total Manufacturing Cost per Unit	$73

An outside supplier has offered to sell Manoah Company all of the axial taps it requires. If Manoah Company decided to discontinue making the axial taps, 40% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labour is a variable cost.

Required:

1. AssumeManoah Company has no alternative use for the facilities presently devoted to production of the axial taps. If the outside supplier offers to sell the axial taps for $65 each, shouldManoah Company accept the offer? Fully support your answer with appropriate calculations.
2. Assume thatManoah Company could use the facilities presently devoted to production of the axial taps to expand production of another product that would yield an additional contribution margin of $80,000 annually. What is the maximum priceManoah Company should be willing to pay the outside supplier for axial taps?