Department A Department B Department C Total
Sales $300,000 $280,000 $120,000 $700,000
Variable Expenses
160,000 175,000 105,000 440,000
Contribution Margin
140,000 105,000 15,000 260,000
Fixed Expenses
65,000 35,000 40,000 140,000
Net Income
$75,000 $70,000 $(25,000) $120,000
Ellen Electric has an offer from a potential supplier to provide 40,000 units at $65 each that Ellen Electric now manufactures at a total cost of $75 per unit. The manufacturing costs for 40,000 units are: direct materials $900,000; direct labor $450,000; variable overhead $900,000; and fixed overhead $750,000. All costs except $500,000 in fixed overhead will be avoided if the parts are purchased.
(A) What should Ellen Electric do in this situation? Explain fully and show your computations.