Richardson Company manufactured 6,000 units of a part that is used in its product L-47 and incurred the following costs:

Direct materials $ 70,000

Direct labor 30,000

Variable manufacturing overhead 20,000

Fixed manufacturing overhead 40,000

$160,000

Bradley, Inc. (an outside firm) has made an offer to sell the same component part to Richardson Company for $24 per unit. In analyzing the Richardson Companys fixed costs, we see that the fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced (cannot be avoided) if the component part was purchased from the outside vendor. If the component part is purchased from the outside vendor, Richardson Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $30,000.

Instructions

Prepare an incremental analysis report for Richardson Companys management to help them make the best decision.