Question

Vaughn Manufacturing incurs the following costs to produce 10700 units of a subcomponent: Direct materials $8988 Direct labor 12091 Variable overhead 13482 Fixed overhead 16200 An outside supplier has offered to sell Vaughn the subcomponent for $2.85 a unit. If Vaughn accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3600. The increase (decrease) in net income from accepting the offer would be

Answer 1

Buying the subcomponent will increase income by $7,666.

Step-by-step explanation:

Giving the following information:

Units= 10,700

Production costs:

Direct materials $8,988

Direct labor $12,091

Variable overhead $13,482

An outside supplier has offered to sell Vaughn the subcomponent for $2.85 a unit.

Additional income= $3,600

To calculate which one is better, we need to determine the total cost of both options. We will not take into account the fixed costs.

Production:

Total cost= 8,988 + 12,091 + 13,482= $34,561

Buy:

Total cost= 10,700*2.85 - 3,600= $26,895

Buying the subcomponent will increase income by $7,666.