Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing
ID: 2480440 • Letter: H
Question
Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows:
Direct materials
$10.00
Direct labor
14.00
Variable overhead
6.00
Fixed overhead
4.00
Total
$34.00
An outside supplier has offered to sell Harris Company part AA1 at a unit cost of $35.00. If Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1.Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for $24,000 per year.
If Harris Company accepts the offer of the outside supplier, annual profits will increase by
Direct materials
$10.00
Direct labor
14.00
Variable overhead
6.00
Fixed overhead
4.00
Total
$34.00
Explanation / Answer
Solution:
Savings in cost Direct material - $ 10 * 5,000 50,000 Direct labor - $ 14 * 5,000 70,000 Variable overhead - $ 6 * 5,000 30,000 Fixed cost 50 % * $ 4 * 5,000 10,000 Savings in cost 160,000 Add: Increase in rent 24,000 Less: Purchase price - $ 35 * 5,000 - 175,000 Increase in income 9,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.