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: Direct materials: $ 9.00 Direct labor: $4.50 Factory overhead: $3.00 Distribution: $1.50 Total: $18.00 Fixed costs per month: Factory overhead: $120,000 Selling and admin: $60,000 Total: $180,000 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 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 is the effect on profits if Miller Company buys from the Tennessee firm?

Question

Business

Jillian Keller

5 May, 05:25

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: Direct materials: $ 9.00 Direct labor: $4.50 Factory overhead: $3.00 Distribution: $1.50 Total: $18.00 Fixed costs per month: Factory overhead: $120,000 Selling and admin: $60,000 Total: $180,000 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 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 is the effect on profits if Miller Company buys from the Tennessee firm?

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Noah Lam · Answer 1

if Miller Company buys from the Tennessee firm there will be a Profit of $128,000

Explanation:

Incremental Cost and Revenues - Miller Company buys from the Tennessee firm.

Savings:

Direct materials: ($ 9.00 * 20,000) 180,000

Direct labor: ($4.50 * 20,000) 90,000

Variable Factory overhead: ($3.00 * 20,000) 60,000

Fixed Factory overhead: $120,000

Purchase:

Purchase Price ($17.00 * 20,000) ($340,000)

Opportunity:

Rentals Income $18,000

Incremental Profit / (Loss) $128,000