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Royal Company manufactures 10,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows: Direct materials
Royal Company manufactures 10,000 units of Part R-3 each year. At this level of activity, the cost per unit for Part R-3 follows: Direct materials $14.40 Direct labour 21.00 Variable manufacturing overhead 9.60 Fixed manufacturing overhead 25.00 Total cost per part $70.00 An outside supplier has offered to sell 10.000 units of Part R-3 each year to Royal Company for $54 per part. If Royal Company accepts this offer the facilities now being used to manufacture Part R-3 could be rented to another company at an annual rental of $150.000. However, Royal Company has determined that S15 of the fixed manufacturing overhead being applied to Part R-3 would continue even if the part were purchased from the outside supplier Required: Prepare computations showing how much profits will increase or decrease if the outside supplier's offer is accepted
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