Question

Cougar Computer Corporation currently manufactures the disk drives that it uses in its computers. The costs to produce 5,000 of these disk drives last year were as follows:

	Cost per drive
Direct materials	$	12
Direct labor		2
Variable manufacturing overhead		5
Fixed manufacturing overhead		7
Total	$	26

Kidal Electronics has offered to provide Cougar with all of its disk drive needs for $27 per drive. If Cougar accepts this offer, Cougar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards. Only $3 per drive of the fixed manufacturing overhead cost above could be avoided. Direct labor is an avoidable cost in this decision.

Based on this information, how much would Cougar be financially better off making the drives or buying the drives from Kidal?

Relevant cost to make and cost savings by buying disk drives would be:

Answer 1