Sweet Dreams produces luxury pillows and bedding for hotels. Historically, Sweet Dreams has manufactured their own cases and covers for the pillows and comforters they sell. However, a comforter manufacturer has recently approached Sweet Dreams with an offer to produce their comforter covers for them for $70 per cover.
Sweet Dreams incurs the following costs in the production of the comforter covers:
$\bullet$$25 for direct materials
$\bullet$$15 for direct labor
$\bullet$$20 for variable overhead
$\bullet$$5 for fixed overhead.
Management is wondering whether they should accept the offer. Sweet Dreams is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose - making bedsheets, which return a profit of $17 per unit (the capacity to manufacture one cover can also be used to manufacture one sheet). Sweet Dreams anticipates needing 35,000 covers this year to meet demand for their comforters.
What would be the impact on operating income if the comforter covers were purchased from the outside supplier?

Question

Sweet Dreams produces luxury pillows and bedding for hotels. Historically, Sweet Dreams has manufactured their own cases and covers for the pillows and comforters they sell. However, a comforter manufacturer has recently approached Sweet Dreams with an offer to produce their comforter covers for them for $70 per cover. 
Sweet Dreams incurs the following costs in the production of the comforter covers:
$\bullet$$25 for direct materials
$\bullet$$15 for direct labor
$\bullet$$20 for variable overhead
$\bullet$$5 for fixed overhead.
Management is wondering whether they should accept the offer. Sweet Dreams is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose - making bedsheets, which return a profit of $17 per unit (the capacity to manufacture one cover can also be used to manufacture one sheet). Sweet Dreams anticipates needing 35,000 covers this year to meet demand for their comforters.
What would be the impact on operating income if the comforter covers were purchased from the outside supplier?

Quizplus · Accepted Answer

The Answer of Sweet Dreams produces luxury pillows and bedding for hotels. Historically, Sweet Dreams has manufactured their own cases and covers for the pillows and comforters they sell. However, a comforter manufacturer has recently approached Sweet Dreams with an offer to produce their comforter covers for them for $70 per cover. 
Sweet Dreams incurs the following costs in the production of the comforter covers:
$\bullet$$25 for direct materials
$\bullet$$15 for direct labor
$\bullet$$20 for variable overhead
$\bullet$$5 for fixed overhead.
Management is wondering whether they should accept the offer. Sweet Dreams is currently at full production capacity: however, if this contract were accepted, the company would use the production equipment for another purpose - making bedsheets, which return a profit of $17 per unit (the capacity to manufacture one cover can also be used to manufacture one sheet). Sweet Dreams anticipates needing 35,000 covers this year to meet demand for their comforters.
What would be the impact on operating income if the comforter covers were purchased from the outside supplier?

Sweet Dreams Produces Luxury Pillows and Bedding for Hotels ∙\bullet∙ $25 for Direct Materials

Sweet Dreams Produces Luxury Pillows and Bedding for Hotels $\bullet$ $25 for Direct Materials