Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,000 remotes is as follows: Cost Direct materials $ 65,000 Direct labor $ 55,000 Variable overhead $ 30,000 Fixed overhead $ 50,000 Total $ 200,000 Frannie is approached by Lincoln Company which offers to make the remotes for $18 per unit. Required: 1. Compute the difference in cost between making and buying the remotes if none of the fixed costs can be avoided. What is the change in net income

Answer 1

$30,000

Step-by-step explanation:

The computation of the difference in cost

Particulars Make Buy (Increase) Decrease in income

Direct material $65,000 $(65,000)

Direct labor $55,000 $(55,000)

Variable Overheads $30,000 $(30,000)

Outside purchase price $180,000 $180,000

Total relevant Cost $150,000 $180,000 $30,000

The $180,000 is come from

= 10,000 × $18

= $180,000