Question

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Direct materials: $ 9.00 Direct labor: $4.50 Factory overhead: $3.00 Distribution: $1.50 Total: $18.00 Fixed costs per month: Factory overhead: $120,000 Selling and admin: $60,000 Total: $180,000 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Miller Company buys from the Tennessee firm?

Answer 1

if Miller Company buys from the Tennessee firm there will be a Profit of $128,000

Step-by-step explanation:

Incremental Cost and Revenues - Miller Company buys from the Tennessee firm.

Savings :

Direct materials: ($ 9.00 × 20,000) 180,000

Direct labor: ($4.50 × 20,000) 90,000

Variable Factory overhead: ($3.00 × 20,000) 60,000

Fixed Factory overhead: $120,000

Purchase :

Purchase Price ($17.00 × 20,000) ($340,000)

Opportunity :

Rentals Income $18,000

Incremental Profit / (Loss) $128,000