Problem: Network Company requires four units of R2 for every unit of D2 that it produces. Currently, R2 is made by Network, with the following per unit costs in a period when 20,000 units were produced:
Direct materials $6.00
Direct labor 2.50
Manufacturing overhead 5.60
TOTAL $14.10
Variable manufacturing overhead is applied at 100% of direct labor cost. The rest of the overhead is fixed. Network will need 20,000 units of R2 for next years production.
Solutions Corporation has offered to supply 20,000 units of R2 at a price of $13.00 per unit. If Network accepts the offer, all of the variable costs and $30,000 of the fixed costs will be eliminated.
Should Network Company accept the offer from Solutions Corp and why or why not?