b-24.02_Pure Comfort

| March 31, 2017

Question

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 $ 500,00,000
Direct labor 800,00,000
Variable factory overhead 160,00,000
Fixed factory overhead 350,00,000
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?

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