Question

Boston Beer Company prints the labels for all of its beer bottles. Boston Beer's costs to produce 1,000,000 labels annually are:

Direct materials	$30,000
Direct labor	$50,000
Variable overhead	$20,000
Fixed overhead	$70,000

An outside supplier has offered to print Boston Beer’s labels for 13 cents per label. If the labels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the space now being used for printing could be rented to another company for $45,000 per year.

What is the change in net annual operating income if Boston Beer chooses to buy the labels from the outside supplier and rents the available space? Should Boston Beer proceed with this offer? (Ignore the impact of selling any of Boston’s printing equipment.)

Answer 1

Cost for 1000000 labels
Particulars	Cost ($)
Direct Material	30,000
Direct Labour	50000
Variable Overhead	20000
Fixed Overhead	70000
Total	1,70,000
Cost per unit	0.17
Cost if the labels are purchased from outside
Particulars	Cost ($)
Cost per unit	0.13
Units	1000000
Total cost of labels	130000
Add:- Fixed Overhead (70,000-15000)	55000
Less:- Additional Income	45000
Total Costs	140000
Net Change in Annual Operating Income	30,000
Boston Beer should accept the offer as it increase the net income by $ 30,000