Question

Engstrom, Inc., uses 10,000 pounds of a specific component in the production of life preservers each year. Presently, the component is purchased from an outside supplier for $11 per pound. For some time now, the factory has had idle capacity that could be utilized to make the component. Engstrom’s costs associated with manufacturing the component are as follows:
Direct materials per lb. ...................... $3
Direct labor per lb. ...................... $3
Variable overhead per lb. ................... $2
Fixed overhead per unit (based on annual production of 10,000 lbs.) .. $2
In addition, if the component is manufactured by Engstrom, the company will hire a new factory supervisor at an annual cost of $32,000.

Required
If Engstrom chooses to make the component instead of buying it from the outside supplier, what would be the change, if any, in the company’s income?



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  • CreatedMarch 11, 2015
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