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

$900

Direct labor

600

Variable overhead

300

Fixed costs

Depreciation of equipment

500

Depreciation of building

275

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)

Explanation / Answer

Producing Purchasing Cost per unit Variable cost Direct material 900 0 Direct labor 600 0 Variable overhead 300 0 Fixed cost Depriciation of equipment 500 500 Depriciation of building 275 275 Less : saving by leasing 55000 /1000 (55) superviors salaries 300 0 Purchase cost 2000 2875 2720 The incremental saving per unit ( 2875 - 2720) 155 Number of units purchased 1000 Total incremental savings 155000

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