Lynn Hart is a managerial accountant at Paibec Corporation. Paibec is under intense cost competition, and Hart has been asked to evaluate whether Paibec should continue to manufacture part MT-RF or purchase it from Marley Company. Marley has submitted a bid to supply the 33,000 MT-RF units that Paibec will need for 2013 at a price of $15.60 each. Paibec has capacity available to produce the 33,000 units.
From plant records and interviews with John Porter, the plant manager, Hart gathered the following information regarding Paibec's costs to manufacture 29,000 units of MT-RF in 2012:
Direct materials $191,400
Direct labor 133,400
Plant space rental 75,000
Equipment lease 32,000
Other overhead 197,200
Total $629,000
Additionally, Porter tells her:
- Variable costs per unit in 2013 will be the same as variable costs per unit in 2012.
- If MT-RF is purchased from Marley, plant space will not have to be rented, and equipment will not have to be leased. But these are annual contracts that are going to be expensive to wiggle out of. Porter estimates it will cost $9,000 to terminate the plant rental contract and $5,500 to terminate the equipment lease contract.
- 45% of the other overhead is variable. The rest is fixed and is expected to remain the same whether MT-RF is manufactured by Paibec or outsourced to Marley.
Hart is aware that cost studies can be threatening to current employees because the findings may lead to reorganizations and layoffs. She knows that Porter is concerned that outsourcing MT-RF will result in some of his close friends being laid off. Therefore, she performs her own independent analysis of competitive and other economic data, which reveals that:
- Direct materials and direct labor wage rates are likely to be higher by 7% and 4%, respectively, in 2013 compared to 2012.
- The plant rental and equipment lease contracts can, in fact, be terminated by paying $7,000 and $3,500, respectively.
- Paibec can actually save $10,000 of the fixed portion of other overhead costs if MT-RF is purchased from Marley.
Based on Hart's estimates, by how much will Paibec's profits change if MT-RF is purchased from Marley? (Note: if the buy costs are less than the make costs, enter the difference as a positive number; if the make costs are less than the buy costs, enter the difference as a negative number.)