Swifty Corporation incurs the following costs to produce 9900 units of a subcomponent:

1. Direct materials $8316

2. Direct labor 11187

3. Variable overhead 12474

4. Fixed overhead 16200

An outside supplier has offered to sell Swifty the subcomponent for $2.85 a unit.

If Swifty could avoid $3000 of fixed overhead by accepting the offer, net income would increase (decrease) by

The net income will increase by $6,712 if the subcomponent is purchased.

Explanation:

Giving the following information:

Swifty Corporation incurs the following costs to produce 9900 units of a subcomponent:

Direct materials $8316

Direct labor 11187

Variable overhead 12474

Fixed overhead 16200

Total cost = $48,177

An outside supplier has offered to sell Swifty the subcomponent for $2.85 a unit.

Swifty could avoid $3000 of fixed overhead by accepting the offer.

We need to calculate the total cost of buying the subcomponent:

Buy:

Total cost = 9,900*2.85 + (16,200 - 3,000) = $41,415

The net income will increase by $6,712 if the subcomponent is purchased.