A Company makes wheels which it uses in the production of children\'s wagons. Th
ID: 2381905 • Letter: A
Question
A Company makes wheels which it uses in the production of children's wagons. The Company's costs to produce 260,000 wheels annually are as follows:Direct material $ 52,000
Direct labor 78,000
Variable manufacturing overhead 39,000
Fixed manufacturing overhead 79,000
Total $248,000
An outside supplier has offered to sell the company similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $34,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $93,400 per year.
If the company chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a: $52,000 incrase or $5,000 decrease or $70,600 increase or $88,400 increase
Explanation / Answer
Make Our Own:
Per Unit Costs:
DM: $52,000/260,000 = $0.20 per unit
DL: $78,000/260,000 = $0.30 per unit
VOH: $39,000/260,000 = $0.15 per unit
Total Per Unit Cost = $0.20 + $0.30 + $0.15 = $0.65 per unit
Total Manufacturing Cost = $248,000 (given)
Hire a Company to Make:
Total Per Unit Cost = $0.80
Total Variable Costs = $0.80 x 260,000 = $208,000
Savings on Fixed Overhead = ($34,000)
New Fixed Overhead = $79,000 - $34,000 = $45,000
Total Manufacturing Cost = $208,000 + $45,000 = $253,000
Money from Renting Facility = ($93,400) >>> "Negative" to show that it will reduce expenses
Total Mfg. Cost w/Rent Reduction = $159,600 ($253,000 - $93,400)
Solution:
Increase in Net Income = Old Total Cost - New Total Cost
Increase in Net Income = $248,000 - $159,600 = $88,400
It is cheaper to have another company make the product and rent the facility out.
PLEASE RATE. Thanks.
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