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 manufacturing costs.         $23                         $736,000

Fixed manufacturing 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. It will also be able to use the freed up space to generate $240,000 of income each year in the production of alternative products. If the offer is accepted, what would be the annual change in the company's overall net operating? It the change is a decrease, enter your number with a – in front. Otherwise, just enter the number.

Answer 1

Differential analysis

	Make	Buy
Variable manufacturing cost	736000
Fixed manufacturing cost (2080000*70%)	1456000
Opportunity Cost	240000
Purchase cost (32000*72)		2304000
Total relevant cost	2432000	2304000

Net operating income increase by (2432000-2304000) = 128000