Irasshai, Inc. produces chairs and couches for reception areas and executive suites. Historically, Irasshai has manufactured their own cushions for the chair they sell. However, a cushion manufacturer has recently approached Irasshai with an offer to produce their cushions for them for $90 per cushion.
Irasshai incurs the following costs in the production of the seat cushions: $20 for direct materials, $40 for direct labor, $20 for variable overhead, and $20 for fixed overhead.
Management is wondering whether they should accept the offer. Irasshai is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose-making specialty pillows, which return a profit of $30 per unit (the capacity to manufacture one cushion can also be used to manufacture one pillow). Irasshai anticipates needing 15,000 cushions this year to meet demand for their chairs.
What would be the impact on operating income if the cushions were purchased from the outside supplier?

Question

Irasshai, Inc. produces chairs and couches for reception areas and executive suites. Historically, Irasshai has manufactured their own cushions for the chair they sell. However, a cushion manufacturer has recently approached Irasshai with an offer to produce their cushions for them for $90 per cushion. 
Irasshai incurs the following costs in the production of the seat cushions: $20 for direct materials, $40 for direct labor, $20 for variable overhead, and $20 for fixed overhead.
Management is wondering whether they should accept the offer. Irasshai is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose-making specialty pillows, which return a profit of $30 per unit (the capacity to manufacture one cushion can also be used to manufacture one pillow). Irasshai anticipates needing 15,000 cushions this year to meet demand for their chairs.
What would be the impact on operating income if the cushions were purchased from the outside supplier?

Quizplus · Accepted Answer

The Answer of Irasshai, Inc. produces chairs and couches for reception areas and executive suites. Historically, Irasshai has manufactured their own cushions for the chair they sell. However, a cushion manufacturer has recently approached Irasshai with an offer to produce their cushions for them for $90 per cushion. 
Irasshai incurs the following costs in the production of the seat cushions: $20 for direct materials, $40 for direct labor, $20 for variable overhead, and $20 for fixed overhead.
Management is wondering whether they should accept the offer. Irasshai is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose-making specialty pillows, which return a profit of $30 per unit (the capacity to manufacture one cushion can also be used to manufacture one pillow). Irasshai anticipates needing 15,000 cushions this year to meet demand for their chairs.
What would be the impact on operating income if the cushions were purchased from the outside supplier?