Evaluating an Outsourcing Decision

Epson produces color cartridges for inkjet printers. Suppose cartridges are sold to mail$-$order distributors for

$$5\mathrm{.}20$ each. Total fixed costs per year are $$957,600.$ Variable cost per unit are $$1\mathrm{.}85$ for direct materials, $$0\mathrm{.}10$

for direct labor, $$0\mathrm{.}30$ for factory overhead, and $$0\mathrm{.}05$ for distribution.

The variable distribution costs are for transportation to mail$-$order distributors. Also assume the current annual

production and sales volume is $504,000$ and annual capacity is $616,000$ units.

REQUIRED

Determine the effect of the following situation on annual profits.

A Guatemalan manufacturer has offered a one$-$year contract to supply ink for the cartridges $($including shipping

costs$)$ at a cost of $$1\mathrm{.}25$ per unit. If Epson accepts the offer, it will be able to reduce variable manufacturing

costs by $50\%$ and rent some of its factory space to another company for $$3,080$ per month for $12$ months.

Note: enter all numbers as positive numbers, do NOT use a negative sign.

Profits would

by $

$\backslash$times if Epson accepted Guatemalan manufacturing offer.

Should Epson accept Guatemalan manufacturing offering?: