Clean Cloths manufactures Washer andDryers. The company produces the 5,000 drums used in its washersannually. The unit cost of making a drum is computed asfollows:
Direct materials | $55.00 |
Direct labor | $25.00 |
Variable manufacturing overhead | $10.00 |
Fixed manufacturing overhead allocated ($100,000) | $20.00 |
Total | $110.00 |
An outside supplier has offered tosupply all the drums for washers needed by Clean Cloths for $95.00.If Clean Cloths accepts the supplier offer $10 in direct materialsand $5 in direct labor would be incurred by Clean Cloths to installthe drum. These costs are already in the above $110amount. If the offer is accepted eighty percent of the fixedmanufacturing overhead can be eliminated.
Required:
a. Assuming there is no other use forthe space currently being used to make the drums should
   the offer by theoutside supplier be accepted. What is the dollar advantage ordisadvantage?
   of accepting the offer.
.b. The space used to produce thedrums can be used to produce 400 more washers. The
    contributionmargin of each washer is $300. What is the dollar advantage ordisadvantage?
    of making theextra washers.
c.   What is themaximum amount Clean Cloths should be willing to pay the outsidesupplier assuming the 400 extra washers can be produced in thespace used to make the drums.
