Question

The Roosevelt Company presently makes 27,000 units of a certain component each year for use on its production line.  The cost per unit for the component at this level of activity is as follows

Direct materials.................................$4.20

Direct Labor.....................................$12.00

Variable factory overhead................. $5.80

Fixed factory overhead......................$6.50

Roosevelt has received an offer from an outside supplier who is willing to provide 27,000 units of this component at a price of $25 per component.  Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed factory overhead could be avoided and the facilities now being used to make the component could be rented to another company for $64,800 per year. If Roosevelt chooses to buy the component from the outside supplier under these circumstances, how much would annual net income increase or decrease by?

Answer 1

	Cost of Making	Cost of Buying	Increase/Decrease in Income
Direct materials	27,000 x 4.20 = 113,400	0	113,400
Direct labor	27,000 x 12 = 324,000	0	324,000
Variable factory overhead	27,000 x 5.80= 156,600	0	156,600
Fixed factory overhead	27,000 x 6.50 = 175,500	140,400	35,100
Opportunity cost	64,800	0	64,800
Outside supplier price	0	27,000 x 25 = 675,000	-675,000
Total cost	$834,300	$815,400	$18,900

If the component is bought from the outside suppliers, annual net income would be increase by $18,900

Kindly comment if you need further assistance.

Thanks‼!