Question

Sheffield Corp. incurred the following costs to produce 100000 units: Variable costs $608000 Fixed costs 900000 An outside supplier has offered to make the item at $5.10 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $175000. The net increase (decrease) in the net income as a result of accepting the supplier's offer is

A. $(77000).
B. $273000.
C. $215000.
D. $784000.
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Answer 1

The net increase in net income from accepting the supplier's offer, after accounting for cost savings and additional leasing income, is $1,173,000.

Step-by-step explanation:

To calculate the net increase or decrease in net income as a result of accepting the supplier's offer, we need to compare the current manufacturing costs to the cost of purchasing the product from the supplier and consider the additional revenue from leasing out the facilities.

• Current production costs are the sum of variable costs and fixed costs, which equals $608,000 + $900,000 = $1,508,000.
• The cost to purchase from the supplier would be 100,000 units × $5.10/unit = $510,000.
• If the facilities are leased out, there would be additional revenue of $175,000.

Now, let's calculate the net impact on income:

• Cost savings by not producing: $1,508,000 - $510,000 = $998,000
• Additional income from leasing: $175,000
• Total potential net income increase: $998,000 + $175,000 = $1,173,000

Therefore, the net increase in net income from accepting the supplier's offer and leasing the facilities would be $1,173,000.