Questions 29-30: Rowena Corporation manufactures laser printers. Rowena currentl

Question

Questions 29-30:

Rowena Corporation manufactures laser printers. Rowena 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:

  

Hardware Solutions, Inc. has offered to provide Rowena with all of its imaging drum needs for $72 per drum. If Rowena accepts this offer, 70% of the fixed manufacturing cost above could be totally eliminated. Also, Rowena will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products.

29.

Based on the information presented, would Rowena be better off to make the drums or buy the drums and by how much?

30.

Assume that demand for Rowena printers goes up from 32,000 annually to 40,000 annually. Also assume that Rowena has the idle capacity to produce the extra 8,000 drums needed for the printers. Under these conditions, would Rowena be better off to make the drums or buy the drums and by how much? (Assume that there is no change in cost structure.)

i want to know how it works.

Explanation / Answer

1)

Savings in cost $128,000

henc he should buy

2)

Increase in cost $264,000 when he buys

hence he should make

Make Buy Cost 32,000*23 $736,000 Purchase 32,000*72 $2,304,000 Fixed cost saving 2080,000@70% (1,456,000) Addittional income ( 240,000) total cost $736,000 $608,000

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