Taser Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows: Direct Materials $15,000 Direct Labor $5,000 Variable overhead $6,000 Fixed overhead $9,000 The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs?

A. an increase in net income of $3,500

B. a decrease in net income of $3,500

C. an increase in net income of $5,500

D. an increase in net income of $7,000

Question

Business

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20 February, 01:38

Taser Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows: Direct Materials $15,000 Direct Labor $5,000 Variable overhead $6,000 Fixed overhead $9,000 The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs?

A. an increase in net income of $3,500

B. a decrease in net income of $3,500

C. an increase in net income of $5,500

D. an increase in net income of $7,000

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Answers (1)

Know the Answer?

Amiya West · Answer 1

The correct answer is B.

Explanation:

Giving the following information:

The costs of producing 175,000 battery packs for its product are as follows:

Direct Materials $15,000

Direct Labor $5,000

Variable overhead $6,000

Fixed overhead $9,000

The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs and $2,000 of fixed costs.

Make in house:

Total cost = 35,000

Buy = 175,000*0.18 + 7,000 (unavoidable fixed costs) = 38,500

Effect on income = 35,000 - 38,500 = 3,500 decrease