Question

Miller Manufacturing builds and markets laptop computers for home and small business use. During the past five years, sales have been as low as 10,000 units in a year and as high as 15,000 units in a year. The company has been approached by an outside supplier offering to provide completed screens to the company for $65 each. The company’s marketing director negotiated the deal personally and is thrilled about how much cheaper it will be to purchase the screens from outside. Producing the cost data outlined below, the manager proudly proclaims, “Look, a $25 per unit savings!”

Per

[Based on 15,000 units year] Unit

Direct materials $40

Direct labor 10

Variable manufacturing overhead 3

Fixed manufacturing overhead, direct 10

Fixed manufacturing overhead, indirect 27

Total cost $90

Assume that Miller Manufacturing determines that sales in future years will be 15,000 units per year. IF the company decides to BUY the screens from the outside supplier, what will be the impact on annual company net income?

Company net income will INCREASE by $30,000 if the company decides to buy the screens from the outside supplier.

Company net income will DECREASE by $30,000 if the company decides to buy the screens from the outside supplier.

Company net income will INCREASE by $375,000 if the company decides to buy the screens from the outside supplier.

Company net income will DECREASE by $375,000 if the company decides to buy the screens from the outside supplier.

Company net income will INCREASE by $225,000 if the company decides to buy the screens from the outside supplier.

Company net income will DECREASE by $225,000 if the company decides to buy the screens from the outside supplier.

Answer 1

	Relevant Cost
Item	Make	Buy	Increase/(Decrease) in net income
Direct Material	600,000
Direct Labor	150,000
Variable Manufacturing Overhead	45,000
Fixed manufacturing Overhead, Direct	150,000
Cost of purchsing from outside supplier		975,000
Total Cost	945,000	975,000	(30,000)
Company net income will DECREASE by $30,000 if the company decides to buy the screens from the outside supplier.

	Relevant Cost
Item	Make	Buy	Increase/(Decrease) in net income
Direct Material	480,000
Direct Labor	120,000
Variable Manufacturing Overhead	36,000
Fixed manufacturing Overhead, Direct	150,000			(Need to focus here, we can see all other cost such as direct material, direct labour and variable manufacturing overhead changes when we calculate relevant cost of making 12000 units instead of 15000 Units. But fixed cost remains the same. Fixed cost does not varies with the change in the level of activity. One must not confused by just seeing it as $10 per unit as given in question. Its just represented that its $10 per unit if divided by 15000 units, per unit will change if divided by 12000 units but it will remain constant in total.
Cost of purchasing from outside supplier		780,000
Total Cost	786,000	780,000	6,000