Hadley Inc makes a line of bathroom accessories Because of a

Hadley, Inc. makes a line of bathroom accessories. Because of a decline in sales, the company has 10,000 machine hours of idle capacity available each year. This idle capacity could be used by the company to make, rather than buy, one of the components used in its production process. Hadley needs 5,000 units of this component each year. At present, the component is being purchased from an outside supplier at $7.50 per unit. Variable production cost for the component would be $4.10 per unit, and additional supervisory costs would be $18,000 per year. Already existing fixed costs that would be allocated to this part amount to $300,000 per year. The change in the company\'s overall annual net operating income that would result from making the component, rather than buying it, would be:

Solution

Differential analysis :

The change in the company\'s overall annual net operating income that would result from making the component, rather than buying it, would be: Decrease by -1000