Hanson, Inc. makes 1,000 units per year of a part called a prositron for use in one of its products. Data concerning the unit production costs of prositron follow:
Direct materials $342
Direct labor $80
Variable manufacturing overhead $48
Fixed manufacturing overhead $520
Total manufacturing cost per unit $990
An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to discontinue making the prositrons, 10% of the above fixed manufacturing overhead costs could be avoided.
Required:
a. Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the prositrons. If the outside supplier offers to sell the prositrons for $850 each, should Hanson, Inc. accept the offer? Fully support your answer with appropriate calculations.
b. Assume that Hanson, Inc. could use the facilities presently devoted to production of the prositrons to expand production of another product that would yield an additional contribution margin of $50,000 annually. What is the maximum price Hanson, Inc. should be willing to pay the outside supplier for prositrons?