United Corporation manufactures laser printers. United currently manufactures the 32,000 imaging drums that it uses in its printers. The annual costs to manufacture these 32,000 drums are as follows:
Cost of drum Total cost
Variable manufacturing cost ............... $23 $736,000
Fixed manufacturing cost .................... $65 $2,080,000
Total cost $88 $2,816,000
Hardware Solutions Inc. has offered to provide United with all of its imaging drum needs for $72 per drum. If United accepts this offer, 70% of the fixed manufacturing cost above could be totally eliminated. Also, United will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products.