Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,240 remotes is as follows:

Direct Materials	$66,170
Direct Labor	55,990
Variable Overhead	30,540
Fixed Overhead	50,900
Total	203,600

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 $20,360 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 $20,360 can be avoided and Frannie could rent out the factory space no longer in use for $20,360?

Answer 1

• [1]

Difference in Cost = $ 31620
Change in net income = Decrease $ (31620)

	Make	Buy	Change in Income- Increase (Decrease)
Direct Material	$66,170	$0
Direct Labor	$55,990	$0
Variable Overhead	$30,540	$0
Fixed Overhead	$50,900	$50,900
Purchase Cost		$184,320
Total	$203,600	$235,220	($31,620)

• [2]
  Difference in Cost = $ 11260
  Change in net income = Decrease $ (11260)

	Make	Buy	Change in Income- Increase (Decrease)
Direct Material	$66,170	$0
Direct Labor	$55,990	$0
Variable Overhead	$30,540	$0
Fixed Overhead	$50,900	$30,540
Purchase Cost		$184,320
Total	$203,600	$214,860	($11,260)

• [3]

Change in net income = Increase $ 9100

	Make	Buy	Change in Income- Increase (Decrease)
Direct Material	$66,170	$0
Direct Labor	$55,990	$0
Variable Overhead	$30,540	$0
Fixed Overhead	$50,900	$30,540
Purchase Cost		$184,320
Additional income		($20,360)
Total	$203,600	$194,500	$9,100