Howell Corporation produces
an executive jet for which it currently manufactures a fuel valve; the cost of
the valve is indicated below:
Cost per Unit:
variable costs $1,800
of equipment $500
of building $200
fixed costs $1,000
company has an offer from Duvall Valves to produce the part for $2,000 per unit
and supply 1,000 valves (the number needed in the coming year). If the company
accepts this offer and shuts down production of valves, production workers and
supervisors will be reassigned to other areas. The equipment cannot be used
elsewhere in the company, and it has no market value. However, the space
occupied by the production of the valve can be used by another production group
that is currently leasing space for $55,000 per year.
is the incremental savings of buying the valves?