Department A Department B Department C Total
Sales $300,000 $280,000 $120,000 $700,000
Variable Expenses
160,000 175,000 105,000 440,000
Contribution Margin
140,000 105,000 15,000 260,000
Fixed Expenses
65,000 35,000 40,000 140,000
Net Income
$75,000 $70,000 $(25,000) $120,000
Ellen Electric has an offer from a potential supplier to provide 40,000 units at $65 each that Ellen Electric now manufactures at a total cost of $75 per unit. The manufacturing costs for 40,000 units are: direct materials $900,000; direct labor $450,000; variable overhead $900,000; and fixed overhead $750,000. All costs except $500,000 in fixed overhead will be avoided if the parts are purchased.
Required:
(A) What should Ellen Electric do in this situation? Explain fully and show your computations.Would your answer change if Ellen Electric could use the capacity that would become available to produce additional income of $125,000? Explain.