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Krusty the Clown's Radio Company currently produces the speakers for the radios it manufactures. The company uses 15,000 speakers per year. Assume that Kathy's has determined that it can purchase the speakers from Side Show Bob's Speaker Company for $2.00 each. Krusty's cost of producing the speakers is as follows:

Cost of producing 15,000 speakers:

Direct Materials $11,100

Direct Labor 9,600

Variable Overhead 3,750

Fixed Overhead 6,900

Total $31,350

Assume fixed costs for Krusty's would be unchanged if they stopped making the speakers.

Required:

1. Should Krusty's Radio Company continue making the speakers rather than buying them? Would they be better or worse off and by what amount?

2. Using the same facts, assume that they if they purchased the speakers they can rent the facilities to someone else for $9,000 a year. Should they continue making the speakers or should they buy them? Would they be better or worse off and by what amount?