Klump Trekkers, Inc., manufactures engines that are used in recreational equipment, such as motorcycles and personal watercraft. The company currently assembles the camshafts for these motors in its assembly department, which employs 40 skilled technicians. Due to crowded plant conditions and a shortage of skilled technicians, Klump is considering outsourcing the camshaft assembly to Mercury Motors, a specialist in the field. Mercury would supply 125,000 camshafts at a price of $88 each.

Mark Tobian is studying the proposed outsourcing deal and has prepared the following analysis.

Savings:

1.Reduction in assembly technicians ($32,500 36)$1,170,000

.Supervisor transferred43,000

Purchasing clerk transferred19,000

Floor space savings [(1,500 $12) + (6,000 $10.50)]81,000

Reduced purchase orders (1,200 $1.40)1,680

Total savings$1,314,680

Costs:

Increased component cost [125,000 ($88 - $79.50)]1,062,500

Hire junior engineer28,000

Hire quality control inspector26,000

Increased storage cost for safety stock (12% 125,000 $3.25)48,750

Total costs1,165,250

Net annual savings$149,430

Additional information Tobian has gathered includes the following:

Of the 40 technicians employed in the assembly department, 36 will be let go. 4 technicians will be retained and transferred to the field service department to perform repair work. The supervisor of the assembly department will be transferred and promoted to assistant floor supervisor. No such position currently exists in the plant.

A junior engineer will be hired to act as a liaison between Klump and Mercury, to ensure technical conformity. A quality control inspector will be hired to monitor Mercury's adherence to quality standards. The clerk in the purchasing department who handled all the camshaft purchasing will be transferred to an open clerical position in the sales department. Funds are available in the sales department to cover this position.

The standard cost of producing a camshaft is as follows:Direct materials$36Direct labor14.50Variable overhead11.60Fixed overhead17.40Total cost$79.50

The 6,000 square feet of space used by the assembly department will be converted to storage space. Currently, the space is valued at $10.50 per square foot. For the past year, Klump has been renting 1,500 square feet of storage space in a nearby building for $12 per square foot. This space will not be needed after the assembly department space is freed up.

Management wants to increase safety stock levels from the current 8% of projected volume to 12% of projected volume. The variable cost to store the camshafts is $3.25 per camshaft.

Klump will no longer need to issue the 1,200 purchase orders for camshaft materials. The variable cost of issuing a purchase order is $1.40.

(B) What would be the financial impact on Klump of outsourcing the camshaft assembly to Mercury?