Question

Assume a division of Hewlett-Packard currently makes 8,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $33 per board, consisting of variable costs per unit of $26 and fixed costs per unit of $7. Further assume Sanmina Corporation offers to sell Hewlett-Packard the 8,000 circuit boards for $33 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $29,000 per year. In addition, $3 per unit of the fixed overhead applied to the circuit boards would be totally eliminated. Use a negative sign with your answer to indicate a net disadvantage, if appropriate.

Answer 1

The net benefit is $5,000.

Step-by-step explanation:

A division of Hewlett-Packard currently makes 8,000 circuit boards per year.

The cost of making a board is $33, consisting of variable costs per unit of $26 and fixed costs per unit of $7.

Sanmina Corporation offers to sell Hewlett-Packard the 8,000 circuit boards for $33 each.

If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $29,000 per year.

In addition, $3 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.

The total cost of manufacturing 8,000 circuit boards

=
`8,000\ *\ \$ 33`

= $2,64,000

Total purchase price

=
`8,000\ *\ \$ 33`

= $2,64,000

Fixed overhead cost applied

=
`8,000\ *\ \$ 3`

= $24,000

The rental income is $29,000.

Outsourcing cost

= Total purchase price + Fixed overhead cost applied - rental income

= $2,64,000 + $24,000 - $29,000

= $2,59,000

Net benefit

= Total cost of manufacturing - Outsourcing cost

= $2,64,000 - $2,59,000

= $5,000