Question

PLUS e pen Assignment e: 07104 PM SOURCES Multiple Choice Question 77 Vaughn Manufacturing incurs the following costs to produce 10800 units of a subcomponent: Direct materials Direct labor Variable overhead 13608 Flxed overhead An outside supplier has offered to sell Vaughn the subcomponent for $2.85 a unit. If Vaughn could avoid $3000 of fixed overhead by accepting the offer, net income would increase (decrease) by $9072 12204 16200 $1104 $(6132). s(4512). $7104 lts bv. Stud Click if you would like to Show Work for this question: Open Shom Work

Answer 1

Here answer is $7104 net income increase by $7104

it is calculated as following

Variable cos of making 10800 units = $9072+$12204+$13608

Variable cost per unit = $34884/10800 = $3.23

Cost of obtaining switch from outside source = $2.85

Benefit from option if product bought from outside supplier to be paid per unit = $3.23-$2.85 = $0.38

Total contribution = 10800*.38= $4104

Benefit from avoidance of fixed cost = $4104+$3000 = $7104

So total income increase by $7104

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