Response to the following problem:
Engstrom, Inc., uses 10,000 pounds of a specific component in the production of life preservers each year. Presently, the component is purchased from an outside supplier for $11 per pound. For some time now, the factory has had idle capacity that could be utilized to make the component. Engstrom's costs associated with manufacturing the component are as follows:
Direct material per pound: $3
Direct Labor per pound $3
Variable Overhead per Pound $2
Fixed Overhead per unit (based on annual production of 10,000 pounds) $2 In addition, if the component is manufactured by Engstrom, the company will hire a new factory supervisor at an annual cost of $32,000.
Required:
If Engstrom chooses to make the component instead of buying it from the outside supplier, what would be the change, if any, in the company's income?