Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Fixed costs per month: Direct materials $ 9.00 Factory overhead $120,000 Direct labor 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total $180,000 Distribution 1.50 Total $18.00 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers to Miller's place of business at the retail stores at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What will be the effect on profits if Miller Company buys from the Tennessee firm?

Question

Business

Ashton Salazar

22 October, 19:55

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Fixed costs per month: Direct materials $ 9.00 Factory overhead $120,000 Direct labor 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total $180,000 Distribution 1.50 Total $18.00 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers to Miller's place of business at the retail stores at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What will be the effect on profits if Miller Company buys from the Tennessee firm?

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Stacy Mcdaniel · Answer 1

The net income will increase by $8,000.

Explanation:

overhead should be considered. Irrelevant costs like distribution cost, fixed overhead should be ignored. They will occur in both the situation and hence will not affect the decision.

Here we will find financial advantage (disadvantage) of buying instead of making

Make Buy Increase

(decrease) in net income

Direct material ($180,000) 0 $180,000

Direct Labor ($90,000) 0 $90,000

factory overhead ($60,000) 0 $60,000

opportunity cost

of making

(Loss of rent income of made) ($18,000) 0 $18,000

cost of buying $0 ($340,000) ($340,000)

Total Net ($348,000) ($340,000) $8,000

The net income will increase by $8,000