Orlando Auto Accessories produces pickup truck bumpers that it sells on a wholes

Question

Orlando Auto Accessories produces pickup truck bumpers that it sells on a wholesale basis to new car retailers. The average bumper sales price is $160. Normal annual sales volume is 300,000 units, which is the company's maximum production capacity. At this capacity, the company's per-unit costs are as follows:

direct material $53 (includes mounting hardware cost of $15 per unit)
direct labor $17
overhead (2/3 is fixed) $45
total $115


A key component in producing bumpers is the mounting hardware used to attach the bumpers to the vehicles. Birmingham Mechanical has offered to sell Orlando Auto Accessories as many mounting units as the company needs for $20 per unit. If Orlando Auto accepts the offer, the released facilities currently used to produce mounting hardware could be used to produce an additional 4,800 bumpers.

What is the net effect profit/loss of purchasing the mounting hardware? (Assume that the company is currently operating at its capacity of 300,000 units.)
$

Explanation / Answer

okay so if instead of making those mounting units they'll buy it from birmingham mech. at $20....$5 more than before... now what happens, cost of bumpers increases from $115 to $120 (due to $5 increase in the mounting price) so then profit decreases from earlier $45 ($160-$115) to $40 ($160-$120) now they can produce an additional 4,800 bumpers in the capacity which was used earlier for producing the mounting units Profit from additional bumpers sold = 4,800 * 40 = $192,000 Cost incurred for buying mounting units from birmingham mech(for earlier 300,000 units) = 300,000 * 5 = $150,000 Net profit of outsourcing = $192,000 - $150,000 = $42,000

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