Tapeo Company has always made its electronic components that go into their GPS s

Question

Tapeo Company has always made its electronic components that go into their GPS systems in-house. Streeter Company has offered to supply these electronic components at a price of $38 each. Tapeo uses 18,000 units of these components each year. The cost per unit of this component is as follows:

Assume that 45% of Tapeo Company's fixed overhead would be eliminated if the electronic component was no longer produced in-house.

Required:

A. If Tapeo decided to purchase the electronic component from Streeter Company how much would its operating income increase or decrease?
$  

B. Should Tapeo continue to make the electronic component or buy it from Streeter Company?

Direct materials $13.75 Direct labor $16.00 Variable overhead $7.00 Fixed overhead $8.25 Total $45.00

Explanation / Answer

Answer A. Statement of Changen in Operating Profit If Electronic Component purchased from Streeter Co. Savings in Costs Direct Material (18000 Units X $13.75)                247,500 Direct Labor (18000 Units X $16)                288,000 Variable Overhead (18000 Units X $7)                126,000 Fixed Overhead (18000 Units X $8.25 X 45%)                  66,825 Cost of Purchasing from Streeter Co. (18000 Units X $38)              (684,000) Changes in Net operating Profit                  44,325 Answer B. Tapeo should Purchase the Component - It will increase its Operating Profit by $44325

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