Question

The Roosevelt Company presently makes 27,000 units of a certain component each year for use on...

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

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?

 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‼!

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