Question

QUESTION 1 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 $630, 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 $95 per unit. Total annual manufacturing costs, including air compressors, is as follows: Direct materials $54,000,000 Direct labor 83,000,000 Variable factory overhead 17,000,000 Fixed factory overhead 36,000,000 If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 25%, direct labor by 35%, and variable factory overhead by 30%. There will be no reduction in fixed factory overhead. (a) Calculate the total cost of each option (internal and outsource). Should Pure Comfort outsource the air compressor

Answer 1

Current Total Manufacturing Cost per Unit:

Direct materials: $108

Direct labor: $166

Variable factory overhead: $34

Fixed factory overhead: $72

Total current manufacturing cost per unit = $380

Total Cost (Internal):

Total current cost per unit = $630

Total Cost with Outsourcing:

Reduction in direct materials = $27

Reduction in direct labor = $58.10

Reduction in variable factory overhead = $10.20

New direct materials cost = $81

New direct labor cost = $107.90

New variable factory overhead = $23.80

Total cost with outsourcing = $308.70

Comparing Costs:

Internal cost per unit: $630

Outsourced cost per unit: $308.70

Based on cost, Pure Comfort should outsource the air compressor component.

Answer 2

Yes it should outsource the air compressor