Question

Marigold Corp. incurs the following costs to produce 10100 units of a subcomponent: Direct materials $8484 Direct labor 11413 Variable overhead 12726 Fixed overhead 16200 An outside supplier has offered to sell Marigold the subcomponent for $2.85 a unit. If Marigold could avoid $3000 of fixed overhead by accepting the offer, net income would increase (decrease) by $838. $(3364). $6838. $(5929).

Answer 1

The effect on net income is an increase by $6838.

Step-by-step explanation:

Analysis of Accepting Special Offer

Savings :

Direct materials $8,484

Direct labor $11,413

Variable overhead $12,726

Fixed Overheads $3,000 $35,623

Total Savings

Costs :

Purchase Price ( $2.85 x 10,100 units) ($28,785)

Effect on Net Income $6,838

Note : We have considered the avoidable component of fixed costs in this calculation. Ignore common fixed costs (unavoidable) since they are irrelevant for decision making.

Conclusion :

The effect on net income is an increase by $6838.