Reference no: EM132517023

The New Visions Lighting Company manufactures various types of household light fixtures. Most of the light fixtures require sixty-watt light bulbs to operate.

Historically, the company has produced its own light bulbs. The costs to produce a bulb (based on capacity operation of 3,000,000 bulbs per year) are:

Direct materials $.10

Direct labour .05

Variable factory overhead .01

Fixed factory overhead .03

Total $.19

• The fixed factory overhead includes $60,000 of depreciation on equipment for which there is no alternative use and no external market value. The balance of the fixed factory overhead pertains to the salary of the production supervisor. While the production supervisor of the light bulb operation has a lifetime employment contract, she has skills that could be used to displace another manager (the supervisor of electrical cord production) who draws a salary of $15,000 per year but is due to retire from the company.

• The Specific Electric Company has recently approached New Visions with an offer to supply all the light bulbs New Visions requires at a price of $.18 per bulb. Anticipated sales demand for the coming year will require 2,000,000 bulbs.

REQUIRED:

Question 1: What is the total annual advantage or disadvantage (in dollars) of buying the bulbs rather than making the bulbs?