Ronald & co. manufactures product F and sells 40,000 units per year at a price o

ID: 2564488 • Letter: R

Question

Ronald & co. manufactures product F and sells 40,000 units per year at a price of $15 per unit.Management is considering purchasing one of the input components from an outside vendor instead of producing it internally.Outsourcing the component would enable the company to increase its production and sales volume of product F by 8% annually without changing the pricce.Costs to manufactire product F for the two alternatives regarding the input component are as follows:

By what amount would Ronald's annual income before taxes increase if the component is outsourced.

Make Outsource Cost of component(per unit) $1.20 $2.00 Other variable manufacturing costs(per unit) $8.00 $7.50 Annual fixed costs $50000.00 $35000.00 Variable selling and administration (per unit) $1.50 $1.50

Explanation / Answer

Make

Outsource

Differential

Cost of component(per unit)

$ 1.20

$ 2.00

$ 0.80

Other variable manufacturing costs(per unit)

$ 8.00

$ 7.50

$ -0.50

Variable selling and administration (per unit)

$ 1.50

$ 0.00

Total variable cost per unit

$ 0.30

Annual fixed costs

$ 50,000.00

$ 35,000.00

-$ 15,000.00

Additional variable cost per unit for outsourcing the component = $0.30

Annual requirement of components = 40,000 components

Increased requirement of components due to increase in sales = 40,000 * 1.08 = 43,200

Additional variable cost = $0.30 * 43,200 = $12,960

Savings in fixed cost = $15,000

Additional sales revenue = $15*40,000 * 0.08 = $48,000

Increase in annual income before tax = Increase in sales – Additional variable cost + Savings in fixed costs

Increase in annual income before taxes = $48,000 - $12,960 + $15,000 = $50,040