Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials $3.00 Direct labor $1.50 Variable overhead $2.75 Fixed overhead $5.00 Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier? a. Yes, income will increase by $10,500. b. Yes, income will increase by $74,500. c. No, income will decrease by $15,000. d. No, income will decrease by $71,500.

Question

Business

Alexandria Harmon

15 September, 23:19

Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials $3.00 Direct labor $1.50 Variable overhead $2.75 Fixed overhead $5.00 Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier? a. Yes, income will increase by $10,500. b. Yes, income will increase by $74,500. c. No, income will decrease by $15,000. d. No, income will decrease by $71,500.

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Answers (1)

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Bartlett · Answer 1

The correct answer is D.

Explanation:

Giving the following information:

An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows: Direct materials $3.00 Direct labor $1.50 Variable overhead $2.75 Fixed overhead $5.00 Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring.

Buy = 12*22,000 = 264,000

Fixed overhead = (5*0.70) * 22,000 = 77,000

Total = $341,000

Make in-house:

Direct material = 3

Direct labor $1.50

Variable overhead $2.75

Fixed overhead $5.00

Total unitary cost = 12.25

Total cost = 12.25*22,000 = $269,500