Question

Taser Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows: Direct Materials $15,000 Direct Labor $5,000 Variable overhead $6,000 Fixed overhead $9,000 The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs

Answer 1

It is cheaper to produce in-house. Cost savings= $3500

Step-by-step explanation:

We need to find whether it is better to produce in-house or to purchase to a supplier.

Q= 175000

Produce in house:

Direct Materials $15,000

Direct Labor $5,000

Variable overhead $6,000

Fixed overhead $9,000

Total cost= $35000

Outsource:

Purchase Cost= 175000q*$0.18= $31500

Fixed Cost= (9000-2000)= $7000

Total cost=$38500

It is cheaper to produce in-house. Cost savings= $3500