Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,340 remotes is as follows:

Cost
Direct materials	$	67,210
Direct labor	$	56,870
Variable overhead	$	31,020
Fixed overhead	$	51,700
Total	$	206,800

Frannie is approached by Lincoln Company which offers to make the remotes for $18 per unit.

Required:

1. Compute the difference in cost between making and buying the remotes if none of the fixed costs can be avoided. What is the change in net income?

2. Compute the difference in cost between making and buying the remotes if $20,680 of the fixed costs can be avoided. What is the change in net income?

3. What is the change in net income if fixed cost of $20,680 can be avoided and Frannie could rent out the factory space no longer in use for $20,680?

Part 1 :

Compute the difference in cost between making and buying the remotes if none of the fixed costs can be avoided. What is the change in net income?

	Difference in cost    per unit Change in net income

Part 2 :

Compute the difference in cost between making and buying the remotes if $20,680 of the fixed costs can be avoided. What is the change in net income?

	Difference in cost    per unit    Change in net income

Part 3 :

What is the change in net income if fixed cost of $20,680 can be avoided and Frannie could rent out the factory space no longer in use for $20,680?

	Change in net income

Answer 1

1.

	Making	Buying	Difference
Direct Material	$       67,210		$       67,210
Direct Labor	$       56,870		$       56,870
Variable Overhead	$       31,020		$       31,020
Fixed Overhead			$               -
Purchase Cost		$       186,120	$   (186,120)
Total	$     155,100	$       186,120	$    (31,020)
Cost per unit	$         15.00	$            18.00	$         (3.00)

Change in Net Income = Decrease $31020

2.

	Making	Buying	Difference
Direct Material	$       67,210		$       67,210
Direct Labor	$       56,870		$       56,870
Variable Overhead	$       31,020		$       31,020
Fixed Overhead	$       20,680		$       20,680
Purchase Cost		$       186,120	$   (186,120)
Total	$     175,780	$       186,120	$    (10,340)
Cost per unit	$         17.00	$            18.00	$         (1.00)

Change in net income = Decrease $10340

3.

	Making	Buying	Difference
Direct Material	$       67,210		$       67,210
Direct Labor	$       56,870		$       56,870
Variable Overhead	$       31,020		$       31,020
Fixed Overhead	$       20,680		$       20,680
Purchase Cost		$       186,120	$   (186,120)
Opportunity to rent	$       20,680		$       20,680
Total	$     196,460	$       186,120	$      10,340
Cost per unit	$         19.00	$            18.00	$           1.00

Change in Net Income = Increase $10340