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Notterdam Corporation manufactures laser printers. Rowell currently manufactures the 32,000 imaging drums that it uses in its printers. The annual costs to manufacture these 32,000 drums are as follows:

Cost of drum Total cost

Variable manufacturing cost ............... $23 $736,000
Fixed manufacturing cost .................... $65 $2,080,000
Total cost $88 $2,816,000

Hardware Solutions Inc. has offered to provide Rowell with all of its imaging drum needs for $72 per drum. If Rowell accepts this offer, 70% of the fixed manufacturing cost above could be totally eliminated. Also, Rowell will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products.

Based on the information presented, would Rowell be better off to make the drums or buy the drums and by how much?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M945850

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