Star Industries manufactures 16,000 lens per year as one part of their telescope

Question

Star Industries manufactures 16,000 lens per year as one part of their telescopes.

The costs to manufacture the lens are as follows:

If the lens is purchased, a part of the manufacturing facility can be rented to another business for $62,000.

An outside supplier has offered to sell the lens to Star for $42 each.

If Star purchases the component instead of manufacturing it, the effect on Star’s net income would be..

Direct materials $530,000 Direct labor $40,000 Variable manufacturing overhead $82,000 Fixed manufacturing overhead
(allocated common costs) $59,000        Total costs $711,000

Explanation / Answer

Solutions Calculation of in house cost per lens: we don’t consider fixed cost as it wont affect the manufacturing. Total cost including material, labour and variable oh 652000 Total lens 16000 Cost per lens 40.75 Cost benefit analysis if we buy lens from outside supplier Benefit from renting the manufacturing facility 62000 Lesss: Extra cost if we buy from outside supplier (42-40.75)*16000 20000 Net benefit if we buy from outside supplier 42000

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