Question

Exercise 6-12A (Algo) Outsourcing decision with qualitative factors LO 6-3 Baird Corporation, which makes and sells 80,000 radios annually, currently purchases the radio speakers it uses for $20 each. Each radio uses one speaker. The company has idle capacity and is considering the possibility of making the speakers that it needs. Baird estimates that the cost of materials and labor needed to make speakers would be a total of $18 for each speaker. In addition, supervisory salaries, rent, and other manufacturing costs would be $187,000. Allocated facility-level costs would be $99,500. Required a. Determine the change in net income Baird would experience if it decides to make the speakers. Net income will be IOWA

Answer 1

Answer:

Baird Corporation
(A) Cost of procurement of speaker (80,000 * $20)		$1,600,000
Relevant cost of manufacturing speaker:
Variable cost (80,000 * $18)		$1,440,000
Other Manufacturing Cost		$187,000
(B) Total relevant cost of internal manufacturing		$1,627,000
Excess cost of internal manufacturing (A - B)		($27,000)

Hence, Net Income will be Lower by $27,000.

Note: Other manufacturing cost is additional relevant cost and allocated facility level cost has no role in decision making.