Altertech Inc. manufactures a product which contains a circuit board. The compan

Question

Altertech Inc. manufactures a product which contains a circuit board. The company has always purchased this circuit board from a supplier for $32 each. Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the circuit board instead of buying it. The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 110% of direct labor cost.

Direct materials $2
direct labor 20
Overhead (fixed and variable) 22
Total $44

The required volume of output to produce the circuit boards will not require any incremental fixed overhead. Incremental variable overhead cost is $3 per circuit board. What is the effect on income if Altertech decides to make the circuit boards?
Income will decrease by $7 per unit.
Income will increase by $7 per unit.
Income will increase by $12 per unit.
Income will decrease by $12 per unit.
Income will increase by $10 per unit.

Explanation / Answer

Cost to make: 2 + 20 + 22 = 44 Cost to buy: 32 + 19 (OH) = 51 Answer: Income will increase by $7 per unit

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