Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,160 remotes is as follows:

Cost

Direct materials $ 66,040

Direct labor $ 55,880

Variable overhead $ 30,480

Fixed overhead $ 50,800

Total $ 203,200

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 $20,320 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 $20,320 can be avoided and Frannie could rent out the factory space no longer in use for $20,320?

Answer 1