Case 1
Hairdo Products manufactures 30,000 units of part K-7 each year for use on its production line. At this
level of activity, the cost per unit for part K-7 is:
Direct materials . . . . . . . . . . . . . . . . . . . . . $ 4
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . $12
Variable manufacturing overhead . . . . . . . $5
Fixed manufacturing overhead . . . . . . . . . $12
Total cost per part . . . . . . . . . . . . . . . . . . . $25
An outside supplier has offered to sell 20,000 units of part K-7 each year to Hairdo Products for $21
per part. If Hairdo Products accepts this offer, the facilities now being used to manufacture part K-7
could be rented to another company at an annual rental of $100,000. However, Hairdo Products has
determined that two-thirds of the fixed manufacturing overhead being applied to part K-7 would
continue even if part K-7 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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Case 1 Hairdo Products manufactures 30,000 units of part K-7 each year for use on its...
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