Car Company is trying to decide whether to keep producing its engine internally
ID: 2429539 • Letter: C
Question
Car Company is trying to decide whether to keep producing its engine internally or outsource this part to a supplier. Currently, to produce the engine, cost of direct materials is $216/unit, cost of direct labor is $342/unit. Overhead for the engine division includes $7,650/month of rent on the facility, which is only used for the production of engines, and $3,500/month of salary for the supervisor of this product line. The company needs to pay $635/unit if it decides to outsource this production. If the company sells 100 engines each month, what is the change in net income for one month if it decides to outsource?
Decrease of $4,350
Increase of $7,700
Decrease of $7,700
Increase of $3,450
Decrease of $3,450
Decrease of $4,350
Increase of $7,700
Decrease of $7,700
Increase of $3,450
Decrease of $3,450
Explanation / Answer
Answer:Increase of $3,450
Explanation:
If produce internally
Cost of direct materials per unit $216
Cost of direct labor per unit $342
Total variable cost per unit $558
Total variable cost (558*100) $55800
Fixed costs :
Rent $ 7,650
Salary $ 3,500
Tota cost $ 66,950
If outsoure this production
Cost (100*635) $63,500
Cost savings $3,450
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