Question

Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials $3.00 Direct labor $1.50 Variable overhead $2.75 Fixed overhead $5.00 Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier? a.Yes, income will increase by $10,500. b.Yes, income will increase by $74,500. c.No, income will decrease by $15,000. d.No, income will decrease by $71,500.

Answer 1

Answer:

The correct answer is D.

Explanation:

Giving the following information:

An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials $3.00 Direct labor $1.50 Variable overhead $2.75 Fixed overhead $5.00 Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring.

Buy= 12*22,000= 264,000

Fixed overhead= (5*0.70)*22,000= 77,000

Total= $341,000

Make in-house:

Direct material= 3

Direct labor $1.50

Variable overhead $2.75

Fixed overhead $5.00

Total unitary cost= 12.25

Total cost= 12.25*22,000= $269,500