EPI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Control Freak Co. (CFC) to produce 10,000 units of the module per year for \($15\) each. The following information pertains to EPI’s production of the control modules:

EPI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, EPI has no specific use in mind for the space that is currently dedicated to the control module production.

Required:

1. Determine the impact this decision will have on EPI’s annual income.

2. Should EPI buy the modules from CFC or continue to make them!

3. Suppose that the EPI space currently used for the modules could be utilized by a new product line that would generate \($35,000\) in annual profit. Does this change your recommendation to EPI? If so, how?

Electronic Playground, Inc. (EPI), manufactures and sells computer games. The company has several product lines based on the age range of the target market and the games marketing as educational or entertainment. EPI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, EPI has developed and manufactured all CDs itself as well as the accessories and packaging for all of its products.

The gaming market has traditionally been targeted at teenagers and young adults. However, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. EPI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.

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Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per unit $ 8 832 wNwo $16