Your Company produces a part used in the manufacture of one of its products. The unit product
Question:
Your Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows:
Direct materials 12
Direct labor 8
Variable manufacturing overhead 3
Fixed manufacturing overhead 10
Unit product cost $33
An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $29 each. The company estimates that 70% of the fixed manufacturing overhead costs can be saved if the parts are purchased from the outside supplier. The production space can be used to produce 10,000 units of another part. This would allow the company to save $25,000 of rent now paid to an outside party. What is the change in net income if the decision is made to purchase the part?
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd Canadian edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang-Hsuan Chen, Gail Cook