J ackson Company produces speakers for home stereo units. The speakers are sold

ID: 2381959 • Letter: J

Question

Jackson Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows:

Variable costs per unit

Direct Materials $9.00

Direct Labor $4.50
Factory overhead $3.00

Distribution $1.50

Total $18.00

Fixed Costs per month

Factory overhead $120,000

Selling and admin $60,000

Total $180,000

The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year, which is 80% of capacity.

A Tennessee manufacturing firm has offered a one-year contract to supply a primary speaker component at a cost of $5.25 per unit. If Jackson accepts the offer, variable costs (other than the distribution costs) drop by 30 percent. Jackson will be able to rent the unused space to an outside firm for $35,000 per year. All other information remains the same as the original data. What is the effect on profits if Jackson buys from the Tennessee firm?

Explanation / Answer

Cost to buy $15.25 x 20 000

305000

Cost to make

Variable cost16.50 x 20 000

330000

365,000

Opportunity costs

35,000

loss

-60000