Martin Company Currently Manufactures All Component Parts Used in the Manufacturing

Martin Company currently manufactures all component parts used in the manufacturing of various hand tools. The Extruding Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost:
$$\begin{array} { l r } \text { Direct materials } & \$ 0.60 \\\text { Direct labor } & 0.40 \\\text { Variable overhead } & 0.10 \\\text { Fixed overhead } & 0.20 \\ \text { Total unit cost } & \$ 1.30 \\\end{array}$$
The Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools. An outside supplier, Venture Steel, has offered to supply 20,000 units of the handle to the Polishing Division for $1.25 per unit. The Extruding Division currently has idle capacity that cannot be used.
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What is the cost impact to Martin Company as a whole of purchasing from Venture Steel? (CMA adapted)

A) increase the handle unit cost by $0.05.
B) increase the handle unit cost by $0.15.
C) decrease the handle unit cost by $0.15.
D) decrease the handle unit cost by $0.25.

Correct Answer:

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