Reference no: EM132814792

Sam's Manufacturing Company currently makes 120 units of a necessary component. Management is considering outsourcing this component for a cost of $1,500 per unit. Sam's incurs the following total production costs:

Direct Materials $90,000
Direct Labor 28,000
Variable Overhead 45,000
Fixed Overhead 25,000

Problem 1: If production is outsourced, none of the fixed overhead costs will be eliminated. How would profits be impacted if Sam's bought the component?

Option 1: Profits would go down by $17,000
Option 2: Profits would go down by $8,000
Option 3: Profits would go up by $25,000
Option 4: Profits would go up by $8,000