V. Huey, Inc. manufactures 20,000 units of part R-3 each year for use on its pro

Question

V. Huey, Inc. manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost per part $ 4.80 7.00 3.20 10.00 $25.00 An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for $23.50 per part. Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier. If the company purchases the part, will income increase or decrease and by how much? a. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $150,000. If the company purchases the part, will income increase or decrease and by how much? b.

Explanation / Answer

a) Differential analysis :

If company purchase the part income will decrease by (380000-470000) = (90000)

b) Differential analysis :

If company purchase the part income will increase by (530000-470000) = 60000

Make Buy Direct material 96000 Direct labour 140000 Variable manufacturing overhead 64000 Fixed manufacturing overhead 80000 Purchase cost 470000 Total 380000 470000

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.