Royal Company manufactures 26,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is: Direct material - $4.90 ; Direct Labor - $7 ; Varialble Manufacturing overhead - $ 3.00 ; Fixed Manufacturing overhead - $15 ; total cost per part - $ 29.90.
An outside supplier has offered to sell 26,000 units of part R-3 each year to Royal Company for $49.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $780,600. However, Royal Company has determined that $10 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.
Total Relevant cost of making 26000 units = $1,298,000
Total relevant cost of buying the product (26000 units) = $1,287,000
What is the oppoutunity cost of making instead of buying?
How much would the profit increase by if the outside suppliers offer is accepted ?