Question

Lightning Remote Cars manufactures remote control cars for children. Historically, Lightning Remote Cars has manufactured their own tires they sell. However, a tire manufacturer has recently approached Lightning Remote Cars with an offer to produce their tires for them for $1.40 per tire. Lightning Remote Cars anticipates needing 50,000 tires this year to meet the demand for their remote control cars. What would be the total impact on operating income if the tires are purchased from the outside supplier

Answer 1

Answer:

operating income would decrease by $2,500 if tires are purchased

Explanation:

offer from outside vendor = $1.40 per tire

yearly demand = 50,000 tires

production costs:

• direct materials $0.25
• direct labor $0.80
• variable manufacturing overhead $0.30
• fixed costs $0.50

total costs = $1.85

total avoidable costs = $1.35

                                     make tires        buy tires          differential amount

produce tires               $92,500           $0                    $92,500

buy tires                       $0                     $95,000          ($95,000)

total                              $92,500           $95,000          ($2,500)

operating income would decrease by $2,500 if tires are purchased