Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,280 remotes is as follows: Cost Direct materials Direct labor Variable overhead Fixed overhead Total $ 66,820 $ 56,540 $ 30,840 $ 51,400 $ 205,600 Frannie is approached by Lincoln Company which offers to make the remotes for $18 per unit Required: 1. Compute the difference in cost between making and buying the remotes if none of the fixed costs can be avoided. What is the change in net income? 2. Compute the difference in cost between making and buying the remotes if $20,560 of the fixed costs can be avoided. What is the change in net income? 3. What is the change in net income if fixed cost of $20,560 can be avoided and Frannie could rent out the factory space no longer in use for $20,560? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 he Compute the difference in cost between making and buying the remotes if none of change in net income? per unit Difference in cost Change in net income Հեգր- ։ Required 2 >

Answer 1

Relevant cost of making = Avoidable cost

= Direct material + direct labor + variable overhead

= 66,820+56,540+30,840

= $154,200

Per unit = 154200/10,280 = $15 per unit

Hence, difference in cost = $18 – $15 = $3 per unit

Change in net income = Decrease by 3*10,280 = $30,840

2. Relevant cost of making = 15 + 20,560/10,280 = $17 per unit

Difference in cost = $1 per unit

Change in net income = $10,280 decrease

3.Change in net income = -10,280+20,560 = $10,280 increase