Question

Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below: Variable costs Cost per Unit Direct material $920 Direct labor 600 Variable overhead 300 Fixed costs Depreciation of equipment 500 Depreciation of building 250 Supervisory salaries 300 The company has an offer from Duvall Valves to produce the part for $2,000 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $55,000 per year. What is the incremental savings of buying the valves? (The answer should be stated in a per-unit format and is a positive number) Round to two decimal places. Your Answer:

Answer 1

solution from the given information, we have . . Compute the incremental Savsugs as followers.- Description : cost per unit Vaginable costs Direct material - $920 Direct labor - $600. Variable overhead - $300 Total variable cost per onit - $1,820 fixed costs supervisory salaries – $300 lease sental ($55,000/10000) - $55 Total cost of production – $2,175 cost of purchase - $2000 per unit incremental savings - $ 175 C$2,175-2000) Thus, the per unit incremental cost. Saving is $175.