Question

During 2010, America, Inc., produced, among other products, 9,300 cameras, incurring the following unit costs: $5 in direct materials, $3 in direct labor, $2 in variable overhead, $4 in fixed overhead, $0.50 in variable selling and administrative expenses, and $1 in fixed selling and administrative expenses. An outsider had offered to produce the cameras for $12 each. Assuming that the factory space would have been idle otherwise, acceptance of the outside offer would have

• A. lost the company $9,300.
• B. saved the company $33,950.
• C. saved the company $18,950
• D. lost the company $13,950.

Answer 1

Incremental Analysis
	Cost of Making	Cost of Buying	Increase/Decrease in Income
Direct materials	9,300 x 5 = 46,500	0	46,500
Direct labor	9,300 x 3 = 27,900	0	27,900
Variable overhead	9,300 x 2 = 18,600	0	18,600
Fixed overhead	9,300 x 4 = 37,200	37,200	0
Variable selling and administrative expense	9,300 x 0.50 = 4,650	0	4,650
Fixed selling and administrative expense	9,300 x 1 = 9,300	9,300	0
Outside supplier price	0	9,300 x 12 = 111,600	-111,600
Total cost	$144,150	$158,100	-13,950

Assuming that the factory space would have been idle otherwise, acceptance of the outside offer would have D. lost the company $13,950.

Correct option is D.

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