Dipuisto Inc. manufactures radios at an annual production level of 50.000 units.

Question

Dipuisto Inc. manufactures radios at an annual production level of 50.000 units. At this production level, the cost per unit for a radio is as follows: An outside supplier has offered to sell the radios to Dipuisto Inc. for $26.20 per unit. If Dipuisto Inc. accepts this offer, then they will not need to employ the supervisor. Also, if the radios are purchased from the outside supplier, then 40% of the fixed manufacturing overhead costs can be eliminated. Assuming that there are no other uses for the facility space that Dipuisto uses to manufacture the radios, what is the annual impact to the company's profit if it buys the radios from the supplier instead of manufacturing them? Profit would decrease by $84,500 Profit would increase by $84,500 Profit would decrease by $ 190,000 Profit would increase by $190,000

Explanation / Answer

Incremental savings per unit =2.1+3.7+8.40 + 6.65 + (9.15*.40)

                                    = 2.1+3.7+8.4+6.65+    3.66 = 24.51

Incremental cost = 26.2

Overall net effect = 50000[24.51 - 26.2 ]   = -84500 loss

correct option is "A" -profit will decrease by 84500 ,as incremental cost is more than incremental savings

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