Question

Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: Direct materials $ 55,000 Direct labor 160,000 Variable overhead 75,000 Fixed overhead 175,000 If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. Reference: Ref 7-3 If the outside supplier offers a unit price of $68, net income will increase (decrease) by:_______.

Answer 1

Answer:

Net income decreases by $10,000

Explanation:

                                                                          5,000 units

                                                     Make            Buy    

Direct materials                         $55,000

Direct labor                                $160,000

Variable overhead                     $75,000

Fixed overhead                          $175,000     $135,000 ($175,000-$40,000)

Cost to purchase (68*5000)                         $340,000

Total cost                                    $465,000   $475,000

Cost lost = $465,000 - $475,000

Cost lost = -$10,000

So, Net income decreases by $10,000