Question

Clannad currently produces and sells 4,000 units per year, and has a capacity of 5,000 units. Enya, Inc. has offered a one-year contract to supply parts at a cost of $30.00/unit. If Clannad accepts, it will reduce fixed costs by 50% and will be able to rent unused space to another company for $18,000 per year. What is the impact on Clannad's profits if it accepts the offer.

Answer 1

Answer: Increase of $20,000

Explanation:

The cost of making a unit is:

= Direct material + Direct labor + Variable overhead + Fixed overhead

= 10 + 14 + 5 + 3

= $32

For 4,000 units that would be:

= 4,000 * 32

= $128,000

Cost of buying 4,000 units :

= Cost of buying + Fixed cost

= (4,000 * 30) + (3 / 2 * 4,000)

= $126,000

This cost is further reduced by the renting of the unused space:

= 126,000 - 18,000

= $108,000

Impact on profit:

= Cost of making - Cost of buying

= 128,000 - 108,000

= $20,000

Increase of $20,000