1. Leo Luken Corporation produces plastic bowls that fit on top of the automatic cat feeders they produce. Each year Leo produces 100,000 pet feeders. The total cost of producing the plastic bowls is $8.50 as detailed below:
Direct Materials: $1.80
Direct Labor: $2.60
Variable Manufacturing Overhead: $2.20
Fixed Manufacturing Overhead: $1.90
An outside supplier has offered to sell all 100,000 units to Leo Luken Corporation for $6.75 per unit. If Leo accepts the offer it has been determined that fixed costs of $35,000 can be avoided but that the facilities being used now to manufacture the plastic bowls cannot be used for other revenue generating purposes. Should Leo Luken Corporation outsource the production of the plastic feeder bowls? What is the impact to operating income for the year of outsourcing? You must numerically support your answer.
2. Leo Luken Corporation produces and sells 8,000 cat feeders. The cat feeders currently sell at a price of $68 per unit. The units have a total cost of $54. Market research has been done that indicates that customers would really like an automatic water fountain that is attached to the feeder. The company could produce such a product. The production would result in additional variable costs of $30 per unit. Leo could sell the all-in-one inclusive units for $98 but would only be able to sell 7,200 units. Should Leo process the product further? Support your answer numerically.
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