Question

Brook & Brian Associates, a local dental practice, currently makes its own dentures for patients. The dental practice uses one part-time contractor who comes in weekly only to make dentures. The contractor is paid $150 per denture set made. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. The practice has $10,000 of fixed overhead related to the denture-making department that can and will be allocated to other areas of the practice if they decide to outsource. The practice makes 1,000 sets of dentures per year. An outside company who specializes in the making of dentures has offered to make each set of dentures for Brook & Brian for $255 per set. If Brook & Brian outsource the making of dentures to the new company, their net income will: Select one: O a. decrease by $15,000. O b. decrease by $5,000. c. remain the same. O o d. increase by $15,000. e. increase by $5,000.

Answer 1

Correct answer---------(b) Decrease by $ 5,000

Working

Differential Analysis
	Make	Buy
Direct material	$ 75,000
Direct labor	$ 150,000
Variable Overheads	$ 25,000
Purchase price		$ 255,000
Total relevant Cost	$ 250,000	$ 255,000

.

Total Cost of Buying	$ 255,000
Total Cost of manufacturing	$ 250,000
Financial Disadvantage of accepting outside offer	$ 5,000