Reference no: EM132621767
Question - Lillian Corporation currently makes a key input into its main product. Bernard, a manager within Lillian, is arguing that the organization should outsource production of this input, and buy it from a third-party supplier.
Currently, the per-unit manufacturing costs are $12 in materials, $18 in labor, $8 in variable manufacturing overhead, and $12 in fixed costs per unit. The fixed costs are allocated from the total of fixed costs generated by the entire factory.
Bernard's third-party supplier would charge Lillian $54 per unit, and could sell to Lillian the entire 1,000 units Lillian needs each year.
Also, if Bernard's plan is implemented, it can use the capacity currently being used to produce an input to generate additional profit of $14,000.
Assuming Lillian is adopting a financial perspective, which of the following statement is true?
a. Lillian should not follow Bernard's plan, because doing so will decrease profits by $2,000.
b. Lillian should not follow Bernard's plan, because doing so will decrease profits by $16,000.
c. Lillian should not follow Bernard's plan, because doing so will decrease profits by $4,000.
d. Lillian should follow Bernard's plan, because doing so will increase profits by $10,000.
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