Howell Corporation produces an executive jet for which it currently manufactures

Question

Howell 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

300

Supervisory salaries

300

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? (The answer should be stated in a per-unit format and is a positive number)

Your Answer:

Explanation / Answer

Solution:

First of all, since detailas are not clear, it is assumed that Depreciation of equipment, Depreciation of building , Supervisory salaries are given per unit.

Computation of Incremental Savings

Savings on Purchases ( Variable cost total - Supply price)        $ 860 per unit.

( $ 960 + $ 600 + 300 - $ 1,000 )

Depreciation of epuipment will be incurred                             ( $ 500 per unit)

Savings in lease rent ( $ 55,000 per year / 1,000 units )            $   55 per unit

Total Incremental Savings                                                   $ 415 per unit

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