Final answer:
Hewlett-Packard has the option to outsource circuit boards for $27 each, which would save $23,000 annually when accounting for the reduced fixed overheads and rental income. This is a Make-or-Buy decision, commonly faced in business strategy.
Step-by-step explanation:
The question involves a Make-or-Buy decision, which is a core concept in managerial accounting and business strategy. Hewlett-Packard is considering outsourcing circuit boards from Sanmina Corporation at a cost of $27 per board. The company needs to consider the cost savings and other financial benefits of renting out its facilities, as well as the reduction of fixed overhead costs if it stops producing the boards internally.
To calculate the net benefit or cost to HP of outsourcing, we need to compare the costs of making the boards in-house versus the costs of purchasing the boards from Sanmina and the additional income from renting out the facilities.
Currently, HP's cost to make 16,000 boards in-house is:
Variable costs: 16,000 boards x $22 = $352,000
Fixed costs: 16,000 boards x $5 = $80,000
Total in-house costs: $352,000 + $80,000 = $432,000
If HP outsources, it would spend:
Purchase cost: 16,000 boards x $27 = $432,000
Minus fixed overhead savings: 16,000 boards x $3 = $48,000
Plus income from renting facilities: $25,000
Total outsourcing cost: $432,000 - $48,000 + $25,000 = $409,000
The net benefit of outsourcing for HP, therefore, would be the difference between the in-house production costs and the outsourcing costs: $432,000 (in-house) - $409,000 (outsourcing) = $23,000 savings.