Question

assume a division of hewlett-packard currently makes 12,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $29 per board, consisting of variable costs per unit of $21 and fixed costs per unit of $8. further assume sanmina corporation offers to sell hewlett-packard the 12,000 circuit boards for $29 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 $28,000 per year. in addition, $5 per unit of the fixed overhead applied to the circuit boards would be totally eliminated. should hp outsource this component from sanmina corporation? calculate the net advantage (disadvantage) to hp of outsourcing the component from samina corporation. use a negative sign with your answer to indicate a net disadvantage for outsourcing, if appropriate. $answer

Answer 1

HP would save $88,000 by outsourcing to Sanmina Corporation, as the total cost of outsourcing is $260,000 compared to the in-house production cost of $348,000, indicating a net advantage to outsourcing the production of circuit boards.

Step-by-step explanation:

To determine if Hewlett-Packard should outsource the production of circuit boards to Sanmina Corporation, we need to calculate the net advantage or disadvantage of doing so. Currently, HP makes 12,000 circuit boards at a cost of $29 each, consisting of $21 in variable costs and $8 in fixed costs. If outsourced, Sanmina offers the circuit boards also at $29 each. However, outsourcing means HP could rent out their current production facilities for $28,000 per year and save $5 per unit of fixed overhead costs.

Here's the cost calculation for making the boards in-house:

• Total variable cost: 12,000 boards × $21 = $252,000
• Total fixed cost: 12,000 boards × $8 = $96,000
• Total in-house production cost: $252,000 + $96,000 = $348,000

Here's the cost of outsourcing:

• Total purchase cost: 12,000 boards × $29 = $348,000
• Minus facility rent: -$28,000
• Minus fixed cost savings: 12,000 boards × $5 = -$60,000
• Total outsourcing cost: $348,000 - $28,000 - $60,000 = $260,000

The net advantage of outsourcing is calculated by subtracting the total cost of outsourcing from the total in-house production cost:

Net advantage = $348,000 (in-house) - $260,000 (outsourcing) = $88,000

Therefore, HP would save $88,000 by outsourcing to Sanmina Corporation, indicating a net advantage to outsourcing.