Time remaining: 00 :09 :49 Accounting Q 10:

Sohar Company manufactures 10,000 units of a spare part ALFA each year for use on its production line. At this level of activity, the cost per unit for part ALFA is as follows:

Direct materials $ 2.40

Direct labor 3.50

Variable manufacturing overhead 1.60

Fixed manufacturing overhead 5.00

Total cost per part $12.50

An outside supplier has offered to sell 15,000 units of spare part ALFA each year to Sohar Company for $11.75 per part. If Sohar Company accepts this offer, the facilities now being used to manufacture ALFA could be rented to another company at an annual rental of $75,000.

However, Sohar Company has determined that $3 of the fixed manufacturing overhead being applied to part ALFA would continue even if part ALFA were purchased from the outside supplier.

Required:

a) Prepare computations showing how much profits will increase or decrease if the outside suppliers offer is accepted. b) Also mention which cost is