Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,060 remotes is as follows:

Cost
Direct materials	$	65,390
Direct labor	$	55,330
Variable overhead	$	30,180
Fixed overhead	$	50,300
Total	$	201,200

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 $20,120 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 $20,120 can be avoided and Frannie could rent out the factory space no longer in use for $20,120?

Answer 1

Requirement 1

Difference in cost = $30,180

Change in income = $30,180 Decrease in income

Working

Diffrencial Analysis
	Make	Buy	(Increase) Decrease in income
Direct material	$ 65,390		$       (65,390.00)
Direct labor	$ 55,330		$       (55,330.00)
Variable Overheads	$ 30,180		$       (30,180.00)
Outside purchase price		$ 181,080	$       181,080.00
Total relevant Cost	$ 150,900	$ 181,080	$          30,180.00

.

Requirement 2

Difference in cost = $10,060

Change in income = $10,060 Decrease in income

Working

Diffrencial Analysis
	Make	Buy	(Increase) Decrease in income
Direct material	$ 65,390		$       (65,390.00)
Direct labor	$ 55,330		$       (55,330.00)
Variable Overheads	$ 30,180		$       (30,180.00)
Avoidable fixed overhead	$ 20,120		$       (20,120.00)
Outside purchase price		$ 181,080	$       181,080.00
Total relevant Cost	$ 171,020	$ 181,080	$          10,060.00

.

Requirement 2

Difference in cost = $10,060

Change in income = $10,060 Increase in income

Working

Diffrencial Analysis
	Make	Buy	(Increase) Decrease in income
Direct material	$ 65,390		$       (65,390.00)
Direct labor	$ 55,330		$       (55,330.00)
Variable Overheads	$ 30,180		$       (30,180.00)
Avoidable fixed overhead	$ 20,120		$       (20,120.00)
Outside purchase price		$ 181,080	$       181,080.00
Additional benefit from Buying from outside		-$ 20,120	$       (20,120.00)
Total relevant Cost	$ 171,020	$ 160,960	$       (10,060.00)