Problem - East Coast Coffee Roasters has been producing a coffee grinder that it sells in its stores. The cost to produce these coffee grinders has been:
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Direct Materials
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$5.00 per unit
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Direct Labor
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$6.00 per unit
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Variable Manufacturing Overhead
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$1.00 per unit
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Fixed Manufacturing Overhead
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$2.00 per unit
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In a typical year, the company will produce 60,000 of these grinders.
Recently, an outside supplier has come to the company with an offer to produce the coffee grinders for $12.50 per unit.
If East Coast accepts this offer, 60% of the fixed manufacturing overhead will be eliminated, as it represents the salary of the production supervisor for the coffee grinder division.
Should the company accept this offer? How much will the company's profits increase/decrease if this order is accepted?