b-24.02_Pure Comfort
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| Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort has been producing and selling approximately 500,000 units per year. Each units sells for $600, and there are no variable selling, general, or administrative costs. The company has been approached by a foreign supplier who wishes to provide the air compressor component for $90 per unit. Total annual manufacturing costs, including air compressors, is as follows: | |||
| Direct materials | $ 500,00,000 | ||
| Direct labor | 800,00,000 | ||
| Variable factory overhead | 160,00,000 | ||
| Fixed factory overhead | 350,00,000 | ||
| If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 20%, direct labor by 30%, and variable factory overhead by 25%. There will be no reduction in fixed factory overhead. | |||
| (a) | Should Pure Comfort outsource the air compressor? | ||
| (b) | If outsourcing the air compressor will free up capacity, and enable Pure Comfort to increase production and sales to 600,000 units per year, would it make sense to outsource? | ||
10 years ago
b-24.02_Pure Comfort
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b-24.02_pure_comfort.xls
