Question
luckys produces luxury pillows and bedding for hotels. Historically, Sweet Dreams has manufactured their own cases and covers for the pillows and comforters they sell.
luckys produces luxury pillows and bedding for hotels. Historically, Sweet Dreams has manufactured their own cases and covers for the pillows and comforters they sell. However, a comforter manufacturer has recently approached luckys with an offer to produce their comforter covers for them for $70 per cover.
luckys incurs the following costs in the production of the comforter covers:
$25 per unit for direct materials $15 per unit for direct labor $20 per unit for variable overhead $5 per unit for fixed overhead.
Management is wondering whether they should accept the offer. luckys is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose - making bedsheets, which return a profit of $17 per unit (the capacity to manufacture one cover can also be used to manufacture one sheet). luckys anticipates needing 35,000 covers this year to meet the demand for their comforters.
What would be the impact on operating income if the comforter covers were purchased from the outside supplier?
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