Question

Your Corporation manufactures laser printers. It currently manufactures the 32,000 imaging drums that it uses in its printers. The annual costs to manufacture these 32,000 drums are as follows:

                                                                   Cost/unit                   Total Cost

Variable Costs                                              $23                          $736,000

Fixed Costs                                                  $65                          $2,080,000

Total Costs                                                   $88                           $2,816,000

Another company has offered to provide Your Corporation with all of its imaging drum needs for $72 per drum. If Your Corporation accepts this offer, 70% of the fixed manufacturing cost above could be totally eliminated. If the offer is accepted, what would be the annual change in the company's overall net operating?

Answer 1

Solution:

Relevant cost of making per unit = $23 + $65*70% = $68.50 per unit

Cost of Buying per unit = $72 per unit

If the offer is accepted, there will be decrease in Net Operating Income = ($72 - $68.50) *32000 drums = - $112,000

Hence, annual change in the company's overall net operating = Decrease by $112,000