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2. The Orlando Company uses 5,000 units of part 301 each year.

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2. The Orlando Company uses 5,000 units of part 301 each year. The full manufacturing cost of one unit of part 301 at this volume is:

Direct materials $2.50
Direct labor 3.50
Variable manufacturing overhead 1.50
Average fixed manufacturing overhead 1.00
Total $8.50

An outside supplier has offered to sell Orlando unlimited quantities of part 301 at a unit cost of $8.00. If Orlando accepts this offer, it can eliminate 60 percent of the fixed costs assigned to part 301. Furthermore, the space devoted to the manufacture of part 301 can be rented to another company for $5,000 per year.


Determine in dollars, the increase or decrease of annual profits from Orlando accepting the offer of the outside supplier.

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