Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless drill comes with a battery recharger. Currently, the company manufactures its own recharger for the drill with the following unit costs when 5,000 rechargers are produced each year:
Direct materials
$3.00 per unit
Direct labor
$3.00 per unit
Variable overhead
$1.00 per unit
Fixed overhead
$2.00 per unit
Another manufacturer has offered to supply Ergo with a recharger for a cost of $8 each. Ergo has determined that if they accept the offer, 80% of the fixed overhead allocated to the rechargers will be avoidable.
Question: By what amount will the company’s net income increase or decrease if they outsource? Be sure to indicate if net income would increase or decrease.
Answer: $________
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