The Rogers Company makes 27,000 units of a certain component each year for use on its own production line. The cost per unit for the component at this level of activity is as follows:

Direct materials P4.20

Direct labor 12.00

VFOH 5.80

Fixed FOH 6.50

Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of P25 per component.

1. Assume that there is no other use for the facilities now being used to produce the component. If Rogers Company continues to make the component how much higher or lower will net income be than if the components are purchased from the outside supplier?

P94,500 lower

P81,000 higher

P237,600 higher

P124,000 lower

2. Assume that if the component is produced from the outside supplier, P35,100 of annual fixed factory overhead would be avoided and the facilities now being used to make the component could be rented to another company for P64,800 per year. If Rogers chooses to buy the components from the outside supplier under these circumstances, then the change in annual net income due to accepting the offer is?

P35,100 increase

P99,900 increase

P64,800 increase

P29,700 increase

Answer rating: 100% (QA)

1 Optionb P81000 higher Workings Fixed costs are unavoidable because they would be incurred even if ... View the full answer