Problem

Premier Manufacturing makes and distributes a wall clock that is popular with schools and other institutions. Normal monthly sales are 2,600 clocks at an average sale price of $40 per clock. Production of each clock takes 15 minutes of direct labor and has material costs of $15. The direct labor rate is $20 per hour, and overhead is applied at a rate of $38 per direct labor hour. The overhead spending is 60% fixed and 40% variable costs. Premier has been approached by a supplier offering to supply all of the clocks at a finished cost of $25 per clock. Assume that all fixed overhead would remain, but the variable overhead would be eliminated. What would be the change in monthly operating income if Premier buys the clocks instead of making them?