Question

Moonbeam 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

the correct answer is decrease in net income by $3,500.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

Total cost of purchase = 175,000 × $0.18 = $31,500

Fixed overhead if bought = $9,000 - $2,000 = $7,000

So, total cost in buying = $31,500 + $7,000 = $38,500

Now if we make the product than costing can be calculated as

Cost in making = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead

= $15,000 + $5,000 + $6,000 + $9,000

= $35,000

So, Increase or decrease net income = total cost in making - total cost in buying

= $35,000 - $38,500

= -$3,500 ( Negative shows the decrease in net income)