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

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?

Homework Answers

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.

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