Continue/Discontinue Production & Alternative

Part A. Gorvin Industries makes 100,000 units per year of a part called a BINC gasket for use in one of its products. Data concerning the unit production costs of the BINC gasket follow:

Direct materials $0.15
Direct labor 0.10
Variable manufacturing overhead 0.13
Fixed manufacturing overhead 0.24
Total manufacturing cost per unit $0.62

An outside supplier has offered to sell Gorvin Industries all of the BINC gaskets it requires. If Gorvin Industries decided to discontinue making the BINC gaskets, 25% of the above fixed manufacturing overhead costs could be avoided.

Required:

a. Assume Gorvin Industries has no alternative use for the facilities presently devoted to production of the BINC gaskets. If the outside supplier offers to sell the gaskets for $0.46 each, should Gorvin Industries accept the offer? Please teach/show me the decision supporting calculations.
b. Assume that Gorvin Industries could use the facilities presently devoted to production of the BINC gaskets to expand production of another product that would yield an additional contribution margin (CM) of $10,000 annually. What is the maximum price Gorvin Industries should be willing to pay the outside supplier for BINC gaskets?

Solution Summary

This solution is comprised of a detailed explanation to make decision to Continue/Discontinue Production & Alternative Maximum Payment to External Supplier.