Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually (as part of a larger product it produces). Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead cost will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If Regis Company purchases the plugs but does not rent the unused facility, the company would

be losing $90,000 with this operation

Explanation:

Regis produces 30,000 plugs per year and its overhead costs are $8, so their variable costs are $28 per plug (=$36 - $8).

Orlan offers to sell them the same plugs at $33 per plug, which means that Regis will be paying $5 more per plug than its own variable costs.

Regis variable costs will increase $5 x 30,000 = $150,000 per year.

Its fixed costs will decrease by $60,000 if they decide to purchase the plugs.

If Regis is not able to rent its production facility to someone else, then it will be losing $90,000 with this operation (= $60,000 - $150,000).

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