Foto Company makes 50,000 units per year of a part it uses in the products it manufactures. The cost per unit of this part is shown below:
direct materials .............. $12.00
direct labor .................. 10.10
variable overhead ............. 6.50
allocated fixed overhead ...... 9.60
total ......................... $38.20
An outside supplier has offered to sell Foto Company 50,000 of these parts for $37.60 per unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin earned on this other product would be $310,000 per year.
Calculate the decrease in company profits if Foto Company accepts the outside suppliers offer.