The Gorga Corporation produces 15,000 units of item QT34 annually at a total cost of $600,000.
Direct materials $60,000
Direct labor 165,000
Manufacturing overhead 375,000
Total $600,000
Manufacturing overhead is 36% variable. The Roseland Corporation has offered to supply all 15,000 units of QT34 per year for $35 per unit. If Gorga accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Gorga's leased facilities could be vacated, reducing lease payments by $90,000 per year.
Requirements:
By how much would Gorga's profits change if 15,000 of part QT34 are purchased from Roseland?
At what price would Gorga be indifferent to Roseland's offer?