Rowell Corporation manufactures laser printers. Rowell currently manufactures th

Question

Rowell 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?

Please show work as I need to understand

Explanation / Answer

if they make drums total cost = 2816000 if they buy drums total cost = 72*32000 + 0.3*2080000 = 2928000 extra income = 240000 net cost = 2688000 so they must buy it from hardware solutions

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