Question

Electric Car Maker Tesla makes 100,000 units of "2170 Cell" per year in its Nevada based gigafactory for use in Model 3 Electric car. Data concerning the unit production costs of the "2170 Cell" are as below:

Direct Materials $0.15 Direct Labor 0.10 Variable Manufacturing Overhead 0.13 Fixed Manufacturing Overhead 0.48 Total Manufacturing Cost per unit $0.86

Elon is considering whether its worth making the cell in its factory or outsource it. An outside supplier has offered to sell Tesla all of the "2170 Cell" it requires. If Tesla decides to discontinue making the cells, 25% of the above fixed manufacturing overhead costs could be avoided. Assume that direct labor and direct materials are variable cost.

Required:
a. Assume Tesla has no alternative use for the facilities presently devoted to production of the "2170 Cell" . If the outside supplier offers to sell the "2170 Cell" for $0.46 each, should Tesla accept the offer? Fully support your answer with appropriate calculations. (6 Points)

b. Assume that Tesla could use the facilities presently devoted to production of the "2170 Cell" to expand production of another product that would yield an additional contribution margin of $20,000 annually. What is the maximum price Tesla should be willing to pay the outside supplier for "2170 Cell" ? (4 Points)