Unos manufactures a variety of wheels for use in heavy equipment. The company ha

Question

Unos manufactures a variety of wheels for use in heavy equipment. The company has always produced all of the necessary parts for its cars, including all of the wheels. An outside supplier has offered to sell one type of wheel to Unos for a cost of $34 per wheel. To evaluate this offer, Unos has gathered the following information relating to its own cost of producing the wheel internally: per unit cost 15,000 units per year direct materials ........... $14 $210,000 direct labor ............... $10 $150,000 variable overhead .......... $8 $120,000 allocated fixed overhead ... $6 $ 90,000 If Unos purchases the wheels from the outside supplier, the space that is being used to produce the wheels can be rented to a small business who will pay Unos $18,000 per year for the space. Calculate the amount by which the company's net income will decrease if Unos accepts the outside suppliers offer.

Explanation / Answer

Differential analysis :

If unos accepts the outside supplier offer the company's net income will decrease by ($12000)

Make Buy Direct material 210000 Direct labour 150000 Variable overhead 120000 Opportunity cost 18000 Purchase cost (15000*34) 510000 Total relevant cost 498000 510000

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