Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,260 remotes is as follows:

Cost
Direct materials	$	66,690
Direct labor	$	56,430
Variable overhead	$	30,780
Fixed overhead	$	51,300
Total	$	205,200

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 $20,520 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 $20,520 can be avoided and Frannie could rent out the factory space no longer in use for $20,520?

Required 1 Required 2 Required 3 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? s O per unit Difference in cost Change in net income S 0 Required 1 Required 2 >

Answer 1

Make $ Buy $ 1,84,680 $ Reqi: Particulars Purchase cost Variable overhead: Direct materials Direct Labour Variable overhead Total Variable expenses Fixed overhead Total Cost $ $ 66,690 56.430 30,780 1,53,900 51,300 $ 51,300 2.05.200 $ 2,35,980 $ $ $ Change in Net Income $ Difference in Cost per unit $ -30,780 205200-235980 3 30780/10260 $ Make $ 30,780 51300-20520 Buy $ 1,84.680 Req2: New Fixed cost Particulars Purchase cost Variable overhead: Direct materials Direct Labour Variable overhead Total Variable expenses Fixed overhead Total Cost $ $ $ $ 66,690 56,430 30,780 1,53,900 51,300 $ 30,780 2,05,200 $ 2.15,460 $ $ Change in Net Income $ Difference in Cost per unit $ -10,260 205200-215460 1 10260/10260 $ Make $ 30,780 51300-20520 Buy $ 1,84,680 $ Req3: New Fixed cost Particulars Purchase cost Variable overhead: Direct materials Direct Labour Variable overhead Total Variable expenses Fixed overhead Cost of Rent Total Cost $ $ $ $ 66,690 56,430 30,780 1,53,900 51,300 $ 30,780 20,520 $ 2,25,720 $ 2,15,460 $ $ Change in Net Income $ Difference in Cost per unit $ 10,260 225720-215460 1 10260/10260