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Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

The 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.

What is the incremental savings of buying the valves?

Variable Cost Cost per unit

Direct material	$960
Direct labor	600
Variable overhead	300
Total variable costs	$1,800

Fixed costs
Depreciation of equipment	500
Depreciation of building	300
Supervisory salaries	300
Total fixed costs	1,000
Total cost	$2,800

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9945482

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