Answer:
The net income will increase by $13,000 is the part is out source.
Explanation:
Giving the following information:
Units= 36,000 parts
Total variable cost= $60,000
Total fixed costs= $50,000
The company can buy the part from an outside supplier for $ 2 per unit and avoid 20% of the fixed costs.
Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $15,000.
We need to calculate the effect on the income of buying the part.
First, we will calculate the current cost:
Production:
Total cost= total variable cost + avoidable fixed cost
Total cost= 60,000 + 10,000= $70,000
Buy:
Total cost= 36,000*2 - 15,000= $57,000
The net income will increase by $13,000 is the part is out source.
