Question

XYZ Company makes 400 widgets. The variable costs are $35.60 per unit and fixed costs are $30.00 per unit; however, $21.40 in fixed costs per unit is unavoidable. What is the effect on net income if the company instead buys the widgets from an outside supplier for $44.00 per unit?

Answer 1

increase in income of $80

Step-by-step explanation:

Prepare an Analysis of Costs and Savings if the Company buys from Outside Supplier.

Note : The fixed costs per unit at are unavoidable are irrelevant and disregarded in this decision.

Analysis of Costs and Savings

Purchase Price (400 widgets × $44.00) = ($17,600)

Savings :

Variable Costs ($35.60 × 400 widgets) = $14,240

Fixed Cost ( $8.60 × 400 widgets) = $3,440

Net Income effect = $80

Conclusion :

The effect on net income if the company instead buys the widgets is an increase in income of $80