Answer:
Impact on net income= $118,880
Explanation:
Giving the following information:
Item I51 is used in one of Policy Corporation's products. The company makes 20,800 units.
Direct materials $ 1.90
Direct labor $ 2.90
Variable manufacturing overhead $ 4.00
Supervisor’s salary $ 1.70
Depreciation of special equipment $ 3.40
Allocated general overhead $ 9.20
Buy= 18.60
If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the item was purchased many years ago and has no salvage value or other use. The allocated general overhead represents the fixed costs of the entire company. If the outside supplier's offer were accepted, only $31,600 of these allocated general overhead costs would be avoided.
Make in house:
We will only consider the incremental costs (those that varies on each option)
Direct materials $ 1.90* 20800= 39520
Direct labor $ 2.90=60320
Variable manufacturing overhead $ 4.00= 83200
Supervisor’s salary $ 1.70= 35360
Allocated general overhead= 31600
Total= $250,000
Buy:
18.60*20800= $368880
It is more convenient to continue producing in house.
Impact on net income= 368,880 - 250000= $118,880
