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 12,000 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 $300,000 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 $30,000 if the company decides to buy the screens from the outside supplier.

Company net income will DECREASE by $6,000 if the company decides to buy the screens from the outside supplier.

Company net income will INCREASE by $6,000 if the company decides to buy the screens from the outside supplier.

Company net income will DECREASE by $300,000 if the company decides to buy the screens from the outside supplier.

Answer 1

Avoidable Costs	Per unit
Direct material	$                            40
Direct labor	$                            10
Variable MOH	$                              3
	$                            53
Total Variable Cost for 12,000 units	$                 636,000
Fixed MOH, direct
$10*15,000	$                 150,000
Total Avoidable Cost	$                 786,000

Purchasing cost for 12,000 units = $ 65 x 12,000 = $ 780,000

Net increase in income on purchasing = 786,000 - $ 780,000 = $ 6,000

Hence option 5^th “Company net income will INCREASE by $ 6,000 if the company decides to buy the screens from the outside supplier.” is correct answer.