Blue Ridge Company Currently Manufactures 40,000 Valves Each Year for Use

Blue Ridge Company currently manufactures 40,000 valves each year for use in one of its products. At this 40,000-unit level, the cost per unit for one of these valves is:
An outside vendor has offered to sell 40,000 of the valves to Blue Ridge for $31 per valve. If Blue Ridge accepts this offer, the factory space being used to produce the valves could be leased to another company at an annual rental of $144,000. However, Blue Ridge has determined that 60% of the fixed overhead applied to the valves would continue to be incurred even if the valves were purchased from the outside vendor. What is the amount of financial advantage or disadvantage of accepting the offer from the outside vendor?

A) $404,000 advantage.
B) $260,000 advantage.
C) $64,000 disadvantage.
D) $80,000 advantage.

Correct Answer:

Verified

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