Required information

[The following information applies to the questions displayed below.]

HighValu Inc. manufactures a moderately priced set of lawn furniture (a table and four chairs) that it sells for $280. The company currently manufactures and sells 7,100 sets per year. The manufacturing costs include $96 for direct materials and $56 for direct labor per set. The overhead charge per set is $46, which consists entirely of fixed costs.

Assume that HighValu currently purchases the chair cushions for its lawn set from an outside vendor for $19 per set. HighValus chief operations officer wants an analysis of the comparative costs of manufacturing these cushions to determine whether bringing the manufacturing in-house would save the company money. Additional information shows that if HighValu were to manufacture the cushions, the direct materials cost would be $8 and the direct labor cost would be $6 per set. In addition, to produce the cushions, HighValu would have to purchase cutting and sewing equipment, which would add $21,000 to annual fixed costs.

Required:

1. What is the total relevant cost per year to purchase the chair cushions from the outside supplier?

2. What is the total relevant cost per year to produce the chair cushions internally?

3. What is the estimated net annual effect on operating income of producing the cushions internally rather than purchasing the cushions from an external supplier?