Enterprises manufactures one of the components used to assemble its main company product. Specialty Products, Inc., has offered to make the component at a cost of $12.70 per unit.

Parrot Enterprises' current cost is $16.75 per unit of the component, based on the 105,000 components that Parrot Enterprises currently produces.

1. If Parrot Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much?
2.What is the maximum price per unit Parrot Enterprises would be willing to pay if it outsources the component?

This current cost per unit is based on the following calculations:

None of Parrot Enterprises' fixed costs will be eliminated if the component is outsourced. However, the freed capacity could be used to build a new product. This new product would be expected to generate $26,000 of contribution margin per year.

Direct material per unit. . . . . . . . . . . . . . . .$5.75

Direct labor per unit. . . . . . . . . . . . . . . . . .5.75

Variable manufacturing overhead per unit 2.00

Fixed manufacturing overhead per unit. . .3.25

Total manufacturing costs per unit. . . . . .$16.75

Requirement 1. If Parrot Enterprises outsources the manufacturing of the component, will operating income increase or decrease? By how much? (Enter a "0" for any zero balances. Use a minus sign or parentheses in the Difference column when the cost to make exceeds the cost to buy.)

Incremental Analysis	Make	Outsource
Outsourcing Decision	Component	Component	Difference
Variable costs	?	?	?
Plus: Fixed costs	?	?	?
Total cost of 105,000 components?	?	?	?
Less: Profit from another product	?	?	?
Net cost	?	?	?

Requirement 2: What is the maximum price per unit Parrot Enterprises would be willing to pay if it outsources the component?