1. Hobart Company produces speakers for PA systems. The speakers are sold to retail music stores for $30. Manufacturing and other costs are as follows:

Variable costs per unit:		Fixed costs per month:
Direct materials	$ 9.00	Factory overhead	$120,000
Direct labor	4.50	Selling and admin.	60,000
Factory overhead	3.00	Total	$180,000
Distribution	1.50
Total	$18.00

The variable distribution costs are for transportation to the retail music stores. The current production and sales

volume is 20,000 per year. Capacity is 25,000 units per year.

A Memphis manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If Hobart Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Hobart Company buys from the Memphis firm?

1. decrease of $19,000
2. increase of $19,000
3. increase of $6,000
4. increase of $13,000

The speakers are sold to retail music stores for $30