Waterway Industries incurs the following costs to produce 11800 units of a subcomponent: Direct materials $9912 Direct labor 13334 Variable overhead 14868 Fixed overhead 16200 An outside supplier has offered to sell Waterway the subcomponent for $2.85 a unit. If Waterway accepts the offer, by how much will net income increase (decrease) ?

If the company buys the subcomponent, the company will save $4,484.

Explanation:

Giving the following information:

Production = 11,800 units

Direct materials = $9,912

Direct labor = $13,334

Variable overhead = $14,868

Total variable cost = $38,114

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

We have no reason to believe that the fixed costs are avoidable. Therefore, they take no part in the decision making process.

Total cost of production = 38,114

Total cost of buying = 11,800*2.85 = 33,630

If the company buys the subcomponent, the company will save $4,484.