Question

Please Show Work Typed On Computer Not Hand Written. Thank you!

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Question 10

Quiet Corp. currently makes 2,500 subcomponents a year in one of its factories. The unit costs to produce are:

Description	Per unit
Direct materials	$4
Direct labor	5
Variable manufacturing overhead	2
Fixed manufacturing overhead	3

An outside supplier has offered to provide Quiet Corp. with the 2,500 subcomponents at a $19 per unit price. Fixed overhead is not avoidable.

If Quiet Corp. decides to buy from the outside supplier, the impact to net income will be?

If positive, enter the number, if negative, place a – sign before your number.

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Answer 1

First we have to calculate the cost for the company to produce 2500 sub-componants-

ie., 2500* (Direct material cost per unit + Direct labour cost per unit + Variable manufacturing overhead per unit + Fixed manufacturing overhead per unit )

= 2500 * ( 4 + 5 + 2 + 3 )

= 2500 * 14

= 35000.//

So the cost for the company to produce 2500 sub-componants is 35000.

Now we have to calculate the cost for the company if they purchase the sub-componants from outside party-

The cost of the sub-componant from the outside party is 19.

Therefore the purchasing cost is = 2500 * 19

= 47500.

It is said that the fixed cost is unavoidable and the fixed cost is 3 per unit.

So the fixed cost for 2500 units is = 7500.

Therefore the total cost for the company if they purchase the sub-componant from the outside party is-

= 47500 + 7500

= 55000//.

So the company will incur the cost of $35000  if they produce the sub-componants and if the company purchase it from outside, then they will incur $55000, means purchasing from outside will cause the company to incur more cost than producing the componants.

To calculate the impact of net income for this two cases, we have to find the difference between these two amounts-

ie., 55000 - 35000 = 20000.//

It means the net income will be increased by $20000 , if the company produce the subcomponant instead of purchasing from the outside party.