E1 a proposal is received from an outside contractor

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e­1. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis’s customers as orders are received from Davis’s sales force. Davis’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. Davis’s plant would operate at two­thirds of its normal level, and total fixed manufacturing costs would be cut by 30 percent.
What in­house unit cost should be used to compare with the quotation received from the supplier? Assume the payment to the outside contractor is $215.
e­2. Should the proposal be accepted for a price (that is, payment to the outside contractor) of $215 per unit?
Accepted f­1. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis’s customers as orders are received from Davis’s sales force. Davis’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. The idle facilities would be used to produce 1,600 modified stoves per month for use in extreme climates. These modified stoves could be sold for $450 each, while the costs of production would be $275 per unit variable manufacturing expense. Variable marketing costs would be $50 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 6,000 regular stoves were manufactured or the mix of 4,000 regular stoves plus 1,600 modified stoves were produced. What in­house unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $215.
f­2. Should the proposal be accepted for a price of $215 per unit to the outside contractor?

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