____________________________________________________________________________________

Question 1

How much would be the cost of production under scenario "a" if the mattresses are produced internally without outsourcing the compressors?

___________

Question 2

How much would be the cost of production under scenario "a" if the mattresses are produced internally but outsourced the compressors?

____________

Question 3

How much more it will cost if management recommends outsourcing the compressors under scenario "a"?

___________

Question 4

Is it better to outsource or make internally under scenario "b"

If outsourcing the air compressor will free up capacity, and enable Pure Comfort to increase production and sales to 600,000 units per year, would it make sense to outsource?

a. it is hard to say!

b. Yes, Outsource the compressors

c. No, Do not Outsource the compressor

d. Either way is the same

Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort has been producing and selling approximately 500,000 units per year. Each units sells for $600, and there are no variable selling, general, or administrative costs. The company has been approached by a foreign supplier who wishes to provide the air compressor component for $90 per unit. Total annual manufacturing costs, including air compressors, is as follows: If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 20%, direct labor by 30%, and variable factory overhead by 25%. There will be no reduction in fixed factory overhead. (a) Should Pure Comfort outsource the air compressor? (b) If outsourcing the air compressor will free up capacity, and enable Pure Comfort to increase production and sales to 600,000 units per year, would it make sense to outsource? (a) Direct materials b) Outsource@ 600,000 Units Direct materials $48,000,000 Direct labor $67,200,000 Variable factory overhead $14,400,000 Fixed factory overhead Outsourced compressors Total cost Total cost $218,600,000 Cost Increase Revenue Increase Net effect on Income 37,600,00060,000,00022,400,000