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Chapter 16, Homework "B" Evaluating an Outsourcing Decision Epson produces color cartridges for...

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Accounting

Chapter 16, Homework "B"
Evaluating an Outsourcing Decision
Epson produces color cartridges for inkjet printers. Suppose cartridges are sold to mail-order distributors for $5.20 each. Total fixed costs per year are $342,000. Variable cost per unit are $1.85 for direct materials, $0.10 for direct labor, $0.30 for factory overhead, and $0.05 for distribution.
The variable distribution costs are for transportation to mail-order distributors. Also assume the current annual production and sales volume is 180,000 and annual capacity is 220,000 units.
REQUIRED
Determine the effect of the following situation on annual profits.
A Guatemalan manufacturer has offered a one-year contract to supply ink for the cartridges (including shipping costs) at a cost of $1.25 per unit. If Epson accepts the offer, it will be able to reduce variable manufacturing costs by 50% and rent some of its factory space to another company for $1,100 per month for 12 months.
Note: enter all numbers as positive numbers, do NOT use a negative sign.
Profits would by $ X if Epson accepted Guatemalan manufacturing offer.
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