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12 March, 04:11

Spikes Company manufactures 5,000 high-end racing bicycles each period. Spikes has been making all the components for the bikes, but a supplier has approached Spikes with an offer to sell her bicycle seats at a price of $40. The cost per unit of manufacturing one bicycle seat is computed as ollows: $10 $18 Direct Material Direct Labor Manufacturing overhead (100% fixed) $10 If the bicycle seats are purchased from the outside supplier, $1 per unit of the fixed manufacturing overhead costs can be avoided. If Spikes purchases the seats, the facility used to manufacture the seats would be rented for $20,000 per period. If Spikes chooses to purchase the bicycle seats, the the change in annual net operating income is an: A. $35,000 decrease. B. $35,000 increase. C. $5,000 decrease. D. $5,000 increase. E. $10,000 increase.

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Answers (2)
  1. 12 March, 04:47
    0
    A. $ 35,000 decrease

    Explanation:

    Computation of effect on net income

    Cost of seat procured from outside $ 40 per seat

    No of units manufactured 5000 units

    Total cost of purchase (5000 units * $ 40) $ 200,000

    Savings in internal cost if procured from outside

    Direct Materials $ 10 per seat * 5,000 $ 50,000

    Direct Labour $ 18 per seat * 5,000 $ 90,000

    Differential in Fixed manufacturing overhead $ 1 $ 5,000

    Rental revenue from space $ 20,000

    Total impact on income from procurement $ 165,000

    Incremental cost of procuring from outside $ 35,000

    Since outside procurememt shall entail an additional cost of $ 35,000. the net income shall decrease by $ 35,000
  2. 12 March, 06:34
    0
    A

    Explanation:

    Option A Manufactures Bicycles

    Costs

    $10*5000=-$50000

    $18*5000=-$90000

    $10*5000=-$5000

    total cost = $-190000

    Purchase the bicycles seats

    $40*5000=-$200000

    $9*5000 = - $45000

    $20000 from rent facility

    total costs = -225 000

    Costs has increased meaning for same sales the profits will decrease by $35 000.

    $190000-$225000=$35000
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