Guggenbiller Corporation currently makes 200,000 units per year of a gasket for use in one of its
products. The production manager says that the part costs $3.20 per unit to make. This figure comes
from:
Direct materials $0.55
Direct labor 0.20
Variable manufacturing overhead 0.30
Fixed manufacturing overhead 2.15
Total manufacturing cost per unit 3.20
An outside supplier has offered to sell Guggenbiller Corporation all 200,000 gaskets for $1.40 per
unit. If Guggenbiller decides to discontinue making the gaskets and start purchasing them, $100,000
of the total fixed manufacturing overhead costs could be avoided. However, shipping (not included in
the purchase cost, would be $50,000. An additional profit of $30,000 could be earned through use of
the released facilities.
Required: By how much does Guggenbiller’s income change if the outside supplier’s offer is accepted? Fully support and justify your answer.
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