Question

Logan Company manufactures several toy products. Logan presently manufactures and assembles all the parts for its toy truck product. Another toy company has offered to sell the parts to Logan for $2.00 per truck. Logan is considering this offer. If Logan buys the truck parts instead of making them, the space used in producing the parts could be used for a new toy monster, which is scheduled to begin production next year. If Logan continues to produce the parts for the toy truck, then Logan will have to lease manufacturing space from another company in an adjacent building in order to produce the parts for the new toy monster. The rent that Logan would have to pay would be $8,000 per year.

Cost information related to the production of the toy truck parts is as follows.

Direct materials $1.10

Direct labor 0.30

Variable manufacturing overhead 0.20

Fixed manufacturing overhead 0.20

Total manufacturing costs $1.80

The marketing department has estimated that sales for the toy truck will be approximately 16,000 units per year for the next three years. The fixed manufacturing overhead is indirect and will still be incurred regardless of which decision is made.

By how much will overall Logan Company’s net income change if Logan decides to stop making the parts itself and instead BUY the parts from another toy company?

Logan Company net income will DECREASE by $1,600 if Logan stops making the parts itself and instead buys them from another toy company.

Logan Company net income will INCREASE by $6,400 if Logan stops making the parts itself and instead buys them from another toy company.

Logan Company net income will DECREASE by $3,200 if Logan stops making the parts itself and instead buys them from another toy company.

Logan Company net income will DECREASE by $6,400 if Logan stops making the parts itself and instead buys them from another toy company.

Logan Company net income will INCREASE by $3,200 if Logan stops making the parts itself and instead buys them from another toy company.

Logan Company net income will INCREASE by $1,600 if Logan stops making the parts itself and instead buys them from another toy company.

Answer 1

	Relevant Cost
Item	Make	Buy	Increase/(Decrease) in net income
Direct Material	17,600
Direct Labor	4,800
Variable Manufacturing Overhead	3,200
Lease Rent	8,000
Cost of purchsing from outside supplier		32,000
Total Cost	33,600	32,000	1,600
Logan Company net income will INCREASE by $1,600 if Logan stops making the parts itself and instead buys them from another toy company.