Oxford Engineering manufactures small engines. The motors are sold to manufacturers who assemble them into products such as lawnmowers. The company currently manufactures all the parts used in these engines, but is considering an offer from trusted supplier Tidnish Electronics to supply initial assembly units for $6.95 each.

The starter assembly is currently manufactured in Oxford Engineering's Division 3. Last year, Division 3 produced 136,000 starter sets, but over the next few years, 164,000 sets are expected to be needed each year. The total costs associated with starter assembly last year were as follows:

direct material	$318,240
direct labor	272.000 $
Total overhead	544.000 $
Total	1.134.240 $

Further analysis of the overall load revealed the following information:

• $353,600 of total overhead was fixed.
• $250,600 of fixed overhead can be avoided if the starter assembly is purchased from the supplier.

In addition, if the company purchases the assembly from Tidnish, the freed facility space can be used for storage, thus avoiding the currently accrued $46,000 in external storage costs.

NECESSARY

How much will Oxford Engineering's overall profits change if they decide to buy the starting gear from Tidnish Electronics instead of making them themselves? 

Answer rating: 100% (QA)

To determine the change in overall profits if Oxford Engineering decides to buy the starting gear fr... View the full answer