River Enterprises manufactures one of the components used to assemble its main company product. Specialty Products, Inc., has offered to make the component at a cost of $$13\mathrm{.}20$ per unit. River Enterprises' current cost is $$15\mathrm{.}50$ per unit of the component, based on the $130,000$ components that River Enterprises currently produces.

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This current cost per unit is based on the following calculations:

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None of River Enterprises' fixed costs will be eliminated if the component is outsourced. However, the freed cap a new product. This new product would be expected to generate $$29,000$ of contribution margin per year.

$\backslash$table$[[,$ Incremental Analysis,Make$],[$Outsourcing Decision,Component$],[$Variable costs,$],[$Plus: Fixed costs,$],[$Total cost of $130,000$ components,$],[$Less: Profit from another product,$],[$Net cost$,]]$

Data table

Requirements

If River Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much?

What is the maximum price per unit River Enterprises would be willing to pay

$\backslash$table$[[$Direct material per unit $.................$ $$,4\mathrm{.}25],[$Direct labor per unit $...................,6\mathrm{.}50],[$Variable manufacturing overhead per unit $.,1\mathrm{.}25],[$Fixed manufacturing overhead per unit,$3\mathrm{.}50],[$Total manufacturing costs per unit,$15\mathrm{.}50]]$

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