Tiffany's makes earrings. The total cost to make 1,000,000 earrings are as follows:
Material: $160,000
Labor: $60,000
Indirect costs:
Variable: $120,000
Fixed: $170,000
Total Cost: $510,000
Zales has offered to make the earrings for $0.40. If Tiffany purchases the earrings from Zales, 40% of the fixed costs will be avoided. The remaining 60% will continue regardless of whether the earrings are manufactured or purchased. If the earrings are purchased, the capacity currently used to make the earrings will be idle. In turn, the idle capacity can be leased out resulting in an additional contribution of $50,000 with a related maintenance cost to Tiffany's of $20,000.
How much would Tiffany's save or lose by buying the earrings from Zales? MAKE or BUY