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23 May, 19:38

Moonbeam Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows: Direct Materials $ 15,000 Direct Labor 5,000 Variable Overhead 6,000 Fixed Overhead 9,000 The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs

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  1. 23 May, 19:43
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    the correct answer is decrease in net income by $3,500.

    Explanation:

    According to the scenario, the computation of the given data are as follows:

    Total cost of purchase = 175,000 * $0.18 = $31,500

    Fixed overhead if bought = $9,000 - $2,000 = $7,000

    So, total cost in buying = $31,500 + $7,000 = $38,500

    Now if we make the product than costing can be calculated as

    Cost in making = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead

    = $15,000 + $5,000 + $6,000 + $9,000

    = $35,000

    So, Increase or decrease net income = total cost in making - total cost in buying

    = $35,000 - $38,500

    = - $3,500 (Negative shows the decrease in net income)
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