Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
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?
Variable Cost Cost per unit
|
Direct material
|
$960
|
|
Direct labor
|
600
|
|
Variable overhead
|
300
|
|
Total variable costs
|
$1,800
|
|
|
|
Fixed costs
|
|
|
Depreciation of equipment
|
500
|
|
Depreciation of building
|
300
|
|
Supervisory salaries
|
300
|
|
Total fixed costs
|
1,000
|
|
Total cost
|
$2,800
|