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 200 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

Incremental savings of buying the valve = Cost of making the valves - Cost of buying valves + leasing money saved per valve

= (960 + 600 + 300 + 500 + 200 + 300) - (2000) + 55000 / 1000

= $2860 - 2000 + 55 = $915 per valve

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