Susan Corporation produces an executive jet for which it currently manufactures
ID: 2622287 • Letter: S
Question
Susan Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
Cost per Unit
Variable costs
Direct material
$960
Direct labor
600
Variable overhead
300
Fixed costs
Depreciation of equipment
500
Depreciation of building
250
Supervisory salaries
300
The company has an offer from Lucky 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?
Cost per Unit
Variable costs
Direct material
$960
Direct labor
600
Variable overhead
300
Fixed costs
Depreciation of equipment
500
Depreciation of building
250
Supervisory salaries
300
Explanation / Answer
Costs that would be saved if production is shut down = Variable costs + Supervisory salaries + Depreciation of building
= 960 + 600 +300 + 250 + 300 = $2,410 per valve
Cost of outsourcing production = $2,000 per unit
Incremental savings = Costs that would be saved if production is shut down - Cost of outsourcing production
= $2410 - $2000 = $410 per value
(If total savings is needed, Per unit savings * Total valves = $410 * 1000 = $410,000)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.