Need help with Accounting Question

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Accounting
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Question description

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:

Direct materials $50,000,000

Direct labor 80,000,000

Variable factory overhead 16,000,000

Fixed factory overhead 35,000,000

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?


Tutor Answer

(Top Tutor) Daniel C.
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School: University of Virginia
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