Outsourcing (Make-or-Buy) Decision
Assume a division of Hewlett-Packard currently makes 12,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $34 per board, consisting of variable costs per unit of $24 and fixed costs per unit of $10. Further assume Sanmina-SCI offers to sell Hewlett-Packard the 12,000 circuit boards for $34 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard's suppliers for $46,000 per year. In addition, $6 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.
Calculate the net benefit (cost) to HP of outsourcing the component from Samina-SCI.