The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000.
$$\begin{array} { l r }
\text { Direct materials } & \$ 60,000 \
\text { Direct labor } & 165,000 \
\text { Marmufacturing overhead } & 375,000 \
\text { Total } & \$ 600,000 \
\end{array}$$
Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of Part QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease payments by $90,000 per year.
Required:
a. By how much would Fortune's operating profits change if 15,000 of Part QT34 are purchased from Xu?
b. At what price would Fortune be indifferent to Xu's offer?

Question

The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000.
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 60,000 \
\text { Direct labor } & 165,000 \
\text { Marmufacturing overhead } & 375,000 \
 \text { Total } & \$ 600,000 \
\end{array}$$ 
Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of Part QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease payments by $90,000 per year.
Required:
a. By how much would Fortune's operating profits change if 15,000 of Part QT34 are purchased from Xu?
b. At what price would Fortune be indifferent to Xu's offer?

Quizplus · Accepted Answer

The Answer of The Fortune Company produces 15,000 units of Part QT34 annually at a total cost of $600,000.
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 60,000 \
\text { Direct labor } & 165,000 \
\text { Marmufacturing overhead } & 375,000 \
 \text { Total } & \$ 600,000 \
\end{array}$$ 
Manufacturing overhead is 36% variable. The Xu Company has offered to supply all 15,000 units of Part QT34 per year for $35 per unit. If Fortune accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Fortune's leased facilities could be vacated, reducing lease payments by $90,000 per year.
Required:
a. By how much would Fortune's operating profits change if 15,000 of Part QT34 are purchased from Xu?
b. At what price would Fortune be indifferent to Xu's offer?

The Fortune Company Produces 15,000 Units of Part QT34 Annually