Question

Taser Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows: Direct Materials $15,000 Direct Labor $5,000 Variable overhead $6,000 Fixed overhead $9,000 The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs?
A. an increase in net income of $3,500
B.a decrease in net income of $3,500
C.an increase in net income of $5,500
D.an increase in net income of $7,000

Answer 1

Answer:

The correct answer is B.

Explanation:

Giving the following information:

The costs of producing 175,000 battery packs for its product are as follows:

Direct Materials $15,000

Direct Labor $5,000

Variable overhead $6,000

Fixed overhead $9,000

The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs and $2,000 of fixed costs.

Make in house:

Total cost= 35,000

Buy= 175,000*0.18 + 7,000 (unavoidable fixed costs)= 38,500

Effect on income= 35,000 - 38,500= 3,500 decrease