Kothari Inc.
The telecom division of Kothari Inc. produces and sells 100,000 line modulators. Half of the modulators are sold externally at $150 per unit, and the other half are sold internally at variable manufacturing costs plus 10 percent. Kothari uses variable costing to evaluate the telecom division. The following summarizes the cost structure of the telecom division.
| Variable Manufacturing Costs |
Materials | $ 27.00 |
Labor | 12.00 |
Overhead | 4.00 |
Total manufacturing cost | $ 43.00 |
Fixed manufacturing overhead | $1,700,000 |
Variable period costs (per units) | $18.00 |
Fixed period costs | $1,900,000 |
Required:
a. Calculate the net income of the telecom division (before taxes) using variable costing.
b. Telecom can outsource the final assembly of all 100,000 modulators for $9.00 per modulator. If it does this, it can reduce variable manufacturing cost by $1.00 per unit and fixed manufacturing overhead by $700,000. If the managers of the telecom unit are compensated based on telecom’s net income before taxes, do you expect them to outsource the final assembly of the modulators? Show calculations.
c. What happens to the net cash flows of Kothari Inc. if the final assembly of the modulators is outsourced?
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