Foto Company makes 50000 units per year of a part it uses in the products it man

Question

Foto Company makes 50000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows Direct materials...$22 Direct labor Variable manufacturing overhead....$3 Fixed manufacturing overhead.... $5 Unit product cost $22 An outside supplier has offered to sell the company all of these parts it needs for $49 a unit I the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However,$1 of the foxed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufactur overhead cost would be applied to the company's remaining products ring By how much will Foto Company's income change it it decides to purchase the part instead of manufacture it? Give me the amount with a negative sign if income wouid decrease. Irput just the amount none would increase Ingut 0 if income would not change.

Explanation / Answer

Incremental income from acceptance of offer from Supplier: Savings in cost of manufacture: material 50000*22 1100000 labour 50000*22 1100000 variable oh 50000*3 150000 Savings in cost of manufacture: 2,350,000 Less: Cost of Purchase from Supplier 2,450,000 (50,000 units @49) Decrease in Income -100,000 Income would be decrease by ($100,000) Note: Fixed cost is not taken in to consideration as it is a sunk cost whether charged to this product or charged to other products.

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