Westerville Auto Company produces a small part that it uses in the production of its automobiles. The company's unit product cost for the part, based on a production of 70,000 parts per year, is as follows:
- Per part Total
- Direct Materials $ 4.00
- Direct Labor 3.00
- Variable Manufacturing Overhead 1.00
- Fixed Manufacturing Overhead, Traceable 3.00 $150,000
- Fixed Manufacturing Overhead, Common
- (allocated on basis of labor-hours) 2.50 $125,000
- Unit Product Cost $ 13.50
An outside supplier has offered to supply the parts to the Westerville Auto Company for only $10.00 per part. Fifty percent of the traceable fixed manufacturing cost is supervisor salaries and other costs that can be eliminated if the parts are purchased. The other 50% of the traceable fixed manufacturing costs consist of depreciation and special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.
Ignore the impact of income taxes in your calculation.How much would profits increase or decrease as a result of purchasing the parts from the outside supplier rather than making them inside the company?