Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:
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Direct materials . . . . . . . . . . . . . . . . . . . .
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$ 4.80
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Direct labor . . . . . . . . . . . . . . . . . . . . . . . .
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7.00
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Variable manufacturing overhead . . . . . . .
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3.20
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Fixed manufacturing overhead . . . . . . . . .
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10.00
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Total cost per part . . . . . . . . . . . . . . . . . . .
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$25.00
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An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for
$23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.
Required:
Prepare computations showing how much profits will increase or decrease if the outside supplier's offer is accepted.