Nesbitt 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

$13.00 per unit. Nesbitt Enterprises' current cost is $15.50 per unit of the component, based on the 80,000 components that Nesbitt Enterprises currently produces. Read the requirements.

This current cost per unit is based on the following calculations: None of Nesbitt 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.

Requirement 1. If Nesbitt 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 80,000 components
Less: Profit from another product
Net cost

Direct material per unit. . . . . . . . . . . . . . . . . .	$4.75
Direct labor per unit. . . . . . . . . . . . . . . . . . . . .	7.00
Variable manufacturing overhead per unit. .	2.50
Fixed manufacturing overhead per unit. . . .	1.25
Total manufacturing costs per unit. . . . . . . .	$15.50