Howell Corporation produces an executive jet for which it currently manufactures
ID: 2712639 • Letter: H
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
$900
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:
Question 5 options:
Explanation / Answer
Statement showing evaluation of proposal Particulars Make Buy Make Vs Buy Per Unit Make Vs Buy Direct Materials @900 900,000.00 900,000.00 900.00 Direct Labour @600 600,000.00 600,000.00 600.00 Variable Manu O/H@300 300,000.00 300,000.00 300.00 Purchase Cost @2000 2,000,000.00 (2,000,000.00) (2,000.00) Savings of Lease cost (55,000.00) 55,000.00 55.00 Savings of Supervisory Salaries (300,000.00) 300,000.00 300.00 Total Costs 1,800,000.00 1,645,000.00 155,000.00 155.00 There will be incremental savings of 155 per unit Note: Since production workers and supervisors will be reassigned to other areas they will save cost in other areas
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