Question

Assume a division of Hewlett-Packard currently makes 16,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $27 per board, consisting of variable costs per unit of $22 and fixed costs per unit of $5. Further assume Sanmina Corporation offers to sell Hewlett-Packard the 16,000 circuit boards for $27 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $25,000 per year. In addition, $3 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.
  

Should HP outsource this component from Sanmina Corporation?

Calculate the net advantage (disadvantage) to HP of outsourcing the component from Samina Corporation.

Use a negative sign with your answer to indicate a net disadvantage, if appropriate.

Answer 1

the following is the calculation of net advantage or (disadvantage):

	If manufactured	If purchased	net advantage of purchase
purchase price of 16,000 circuit boards (16,000* $27)	nil	$432,000	($432,000)
variable costs (16,000 * $22)	$352,000	nil	352,000
relevant fixed cost (16,000 *$3)	$48,000	nil	48,000
rental income	nil	($25,000)	25,000
total cost	$400,000	$407,000	($7,000)

There is a net disadvantage of $7,000 if component is outsourced.

note: $2 per unit fixed cost is common for both the alternatives and hence, not relevant.