A restaurant makes pre-packaged smoothies, producing 916,000 packets per year. T

Question

A restaurant makes pre-packaged smoothies, producing 916,000 packets per year.

The costs to manufacture the packets are as follows:

If the packets are purchased, a part of the manufacturing facility can be rented to another business for $32,000.

An outside supplier has offered to sell the packets to the restaurant for $.49 each.

If the restaurant purchases the packets instead of manufacturing it, what would be the effect on the restaurant's net income?

Direct materials $230,000 Direct labor $28,000 Variable manufacturing overhead $62,000 Fixed manufacturing overhead
(allocated common costs) $54,000        Total costs $374,000

Explanation / Answer

Make Buy Direct materials 230000 Direct labor 28000 Variable manufacturing overhead 62000 Opportunity cost 32000 Purchase cost 448840 Total cost 352000 448840 Restaurant's net income will decrease by $96840 ( 352000-448840)

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