Diamond Light Company incurred the following costs to produce 50,000 light switches for floor lamps in 2017.

The Ignition Company has offered to supply the switches for $16 per unit. An analysis of the overhead costs has identified that if the switches are outsourced, Diamond Light Company would eliminate $20,000 of fixed costs, and could use the released production capacity to generate additional income of $56 000 from producing a different product.

Required
a. From a financial perspective, should the light switches be outsourced? Show calculations.
b. What qualitative factors need to be considered in the outsourcing decision?

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Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs $ 100 000 150 000 80 000 120 000 $450 000