Question

We make and sell inexpensive "lab-on-chip" laboratory kits for medical testing. We currently make the microchips used in the laboratory kits. Our absorption unit cost for microchips is detailed below: Direct Materials (DM) $ 1.00 Direct Labor (DL) 10.00 Variable Manufacturing Overhead (VOH) 5.00 Fixed Manufacturing Overhead (FOH) 8.00 $24.00 Total An external supplier offers to sell us 10,000 of the microchips for $22.00 per chip. If we accept this proposal, $50,000 of our fixed overhead will be avoided. Which of the following statement is correct? OA. If we buy chips, we avoid the relevant costs of $220,000. B. The net effect of buying the chip will be a decrease in net income of $10,000. Oc. The net effect of buying the chip will be an increase in income of $10,000. D. None of the above.

Answer 1

- Ans Option B im Solu: 1 Add Cost of Buying -10000 Units Fixed Overhead Net Cost of Buying Cost of Manufacturing Reduction in Profit on Buying 2,20,000.00 (10000*22) 30,000.00 (10000*8-50000) 2,50,000.00 2,40,000.00 (10000*24) 10,000.00