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Use the following information for the next three questions
Use the following information for the next three questions.
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials $8,400 Direct labor 11,250 Variable overhead 12,600 Fixed overhead 16,200
An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. If Clemente accepts the offer, by how much will net income increase (decrease)? 3,225
2. If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would increase (decrease) by 6,750
3. Ilf Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. The increase (decrease) in net income from accepting the offer would be. 7,350
Expert Solution
| 1) Computation of Increase (Decrease) in Net Income: | ||
| Make | Buy | |
| Direct material | 8400 | |
| Direct labor | 11250 | |
| Variable overhead | 12600 | |
| Purchase cost (10000*2.85) | 28500 | |
| Total relevant cost | 32250 | 28500 |
| Increase in Net Income ($32,250-$28,500) | 3750 | |
| 2) Computation of Increase (Decrease) in Net Income from accepting the offer: | |
| Amount | |
| Direct Material | 8,400 |
| Direct Labor | 11,250 |
| Variable Overhead | 12,600 |
| Fixed Overhead | 16,200 |
| Total | 48,450 |
| Variable Cost Per Unit (32,250 / 10,000) | 3.225 |
| Offer from Outside Supplier | 2.85 |
| Difference (3.225-2.85) | 0.375 |
| Total Difference ((0.375*10,000)+3000) | 6750 |
| So, Increase in Net Income | 6750 |
| 3) Computation of Increase (Decrease) in Net Income from accepting the offer: | |
| Amount | |
| Direct Material | 8,400 |
| Direct Labor | 11,250 |
| Variable Overhead | 12,600 |
| Fixed Overhead | 16,200 |
| Total | 48,450 |
| Variable Cost Per Unit (32,250 / 10,000) | 3.225 |
| Offer from Outside Supplier | 2.85 |
| Difference (3.225-2.85) | 0.375 |
| Total Difference ((0.375*10,000)+3600) | 7350 |
| So, Increase in Net Income | 7350 |
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