Question

Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,220 remotes is as follows: Cost Direct materials Direct labor Variable overhead Fixed overhead Total $ 66,430 $ 56,210 $ 30,660 $ 51,100 $ 204,400 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 $20,440 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 $20,440 can be avoided and Frannie could rent out the factory space no longer in use for $20,440? Complete this question by entering your answers in the tabs below. 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? Difference in cost Change in net income per unit Required 2 >

Answer 1

Answer to Requirement 1:

Relevant cost to make = Direct materials + Direct labor + Variable overhead
Relevant cost to make = $66,430 + $56,210 + $30,660
Relevant cost to make = $153,300

Outside purchase cost = Number of units * Cost per unit
Outside purchase cost = 10,220 * $18
Outside purchase cost = $183,960

Relevant cost to purchase = Outside purchase cost
Relevant cost to purchase = $183,960

Difference in cost = Relevant cost to purchase - Relevant cost to make
Difference in cost = $183,960 - $153,300
Difference in cost = $30,660

Difference in cost per unit to make = Difference in cost / Number of units
Difference in cost per unit to make = $30,660 / 10,220
Difference in cost per unit to make = $3

Change in net income = - Difference in cost
Change in net income = -$30,660

Answer to Requirement 2:

Relevant cost to make = Direct materials + Direct labor + Variable overhead + Avoidable fixed overhead
Relevant cost to make = $66,430 + $56,210 + $30,660 + $20,440
Relevant cost to make = $173,740

Relevant cost to purchase = Outside purchase cost
Relevant cost to purchase = $183,960

Difference in cost = Relevant cost to purchase - Relevant cost to make
Difference in cost = $183,960 - $173,740
Difference in cost = $10,220

Difference in cost per unit to make = Difference in cost / Number of units
Difference in cost per unit to make = $10,220 / 10,220
Difference in cost per unit to make = $1

Change in net income = - Difference in cost
Change in net income = -$10,220

Answer to Requirement 3:

Relevant cost to make = Direct materials + Direct labor + Variable overhead + Avoidable fixed overhead
Relevant cost to make = $66,430 + $56,210 + $30,660 + $20,440
Relevant cost to make = $173,740

Relevant cost to purchase = Outside purchase cost - Factory rental revenue
Relevant cost to purchase = $183,960 - $20,440
Relevant cost to purchase = $163,520

Difference in cost = Relevant cost to purchase - Relevant cost to make
Difference in cost = $163,520 - $173,740
Difference in cost = -$10,220

Change in net income = - Difference in cost
Change in net income = $10,220