Question

The Good Sight Lighting Company manufactures various types of household light fixtures. Most of the light fixtures require 60-watt light bulbs. Historically, the company has produced its own light bulbs. The costs to produce a bulb (based on a capacity operation of 3,000,000 bulbs per year) are as follows:

            Direct materials                                   $0.10

            Direct labor                                         0.05

            Variable manufacturing overhead        0.01

            Fixed manufacturing overhead            0.03

            Total                                                    $0.19

Fixed manufacturing overhead includes $60,000 of depreciation on equipment for which there is no alternative use and no external market value. The balance of the fixed manufacturing overhead pertains to the salary of the production supervisor. She has a lifetime employment contract, but she can replace the supervisor of floor maintenance who is retiring from the company. If this move were made, Good Sight could avoid spending $20,000, which is the amount it would have to pay to hire someone from the outside market.

The Clearview Electric Company has recently approached Good Sight with an offer to supply all 3,000,000 light bulbs at a price of $0.18 per bulb. What is the total annual advantage or disadvantage (in dollars) of outsourcing, rather than making the bulbs?

Answer 1