Question

XYZ Company makes 250 widgets. The variable costs are $36.80 per unit and fixed costs are $31.20 per unit; however, $22.60 in fixed costs per unit is unavoidable. What is the effect on net income if the company instead buys the widgets from an outside supplier for $47.00 per unit?

		Decrease of $5,250
		Increase of $400
		Decrease of $400
		Increase of $5,250

Answer 1

• All working forms part of the answer
• Working

	If Produced	If Purchased
Variable cost	$              9,200.00 [250 x 36.8]	$                          -
Fixed Cost	$              7,800.00 [ 250 x 31.20]	$             5,650.00 [250 x 22.60]
Purchase Cost	$                           -	$           11,750.00 [250 x 47]
Total Cost	$            17,000.00	$           17,400.00

• As you can observe, Total cost if purchased from outside supplier is $ 17,400 while Cost of self producing is $ 17,000
• This means that if the widgets are bought from an outside supplier, it would result in Decrease of $ 400 of Net Income [17400 – 17000]
• Correct Answer = Option #3: Decrease of $ 400