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Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual production activities related to this part are as follows:

Direct materials, $24,000

Direct labor, $60,000

Variable overhead, $54,000

Fixed overhead, $84,000

Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor were to accept the offer, some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the part would be totally eliminated.

What should Taylor's decision be, and what is the total cost savings that would result?

 

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