Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,000 remotes is as follows: Cost Direct materials $ 65,000 Direct labor $ 55,000 Variable overhead $ 30,000 Fixed overhead $ 50,000 Total $ 200,000 Frannie is approached by Lincoln Company which offers to make the remotes for $18 per unit. Required: 1. Compute the difference in cost between making and buying the remotes if none of the fixed costs can be avoided. What is the change in net income

Answer 1

Answer:

$30,000

Explanation:

The computation of the difference in cost

Particulars               Make            Buy    (Increase) Decrease in income

Direct material       $65,000             $(65,000)

Direct labor                  $55,000             $(55,000)

Variable Overheads   $30,000              $(30,000)

Outside purchase price     $180,000  $180,000

Total relevant Cost     $150,000   $180,000     $30,000

The $180,000 is come from

= 10,000 × $18

= $180,000