Question

Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for $30. Manufacturing and other costs are as follows: Variable costs per unit: Fixed costs per month: Direct materials $ 9.00 Factory overhead $120,000 Direct labor 4.50 Selling and admin. 60,000 Factory overhead 3.00 Total $180,000 Distribution 1.50 Total $18.00 The variable distribution costs are for transportation to the retail stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year. A Tennessee manufacturing firm has offered a one-year contract to supply speakers to Miller's place of business at the retail stores at a cost of $17.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What will be the effect on profits if Miller Company buys from the Tennessee firm?

Answer 1

The net income will increase by $8,000.    

Explanation:

 overhead should be considered. Irrelevant costs like distribution cost, fixed overhead should be ignored. They will occur in both the situation and hence will not affect the decision.

Here we will find financial advantage(disadvantage) of buying instead of making

                                 Make                 Buy              Increase

                                                                                  (decrease) in net income  

Direct material             ($180,000)           0               $180,000  

Direct Labor                     ($90,000) 0  $90,000  

factory overhead               ($60,000)             0  $60,000  

opportunity cost

of making

(Loss of rent income of made) ($18,000)  0  $18,000  

cost of buying                            $0  ($340,000) ($340,000)  

Total Net                            ($348,000)  ($340,000)  $8,000  

The net income will increase by $8,000                          

Answer 2

When the consequence on profits if Miller Company buys from the Tennessee firm: The net income will increase by $8,000.

Computation of the Net income

Overhead should be considered. Then the Irrelevant costs like disbandment cost, fixed overhead should be ignored. They will occur in both circumstances and therefore will not influence the decision.

Here we will locate the financial advantage(disadvantage) of buying instead of making

                                Make                       Buy                     Increase

                                                                               (decrease) in net income  

                                                                                                                           

Direct material             ($180,000)                0                     $180,000  

Direct Labor                     ($90,000)              0                       $90,000  

factory overhead              ($60,000)            0                        $60,000  

opportunity cost

of making

(Loss of rent income of made) ($18,000)        0                          $18,000  

cost of buying                             $0            ($340,000)                ($340,000)  

                                                                                                                         

The Total Net is                           ($348,000)        ($340,000)         $8,000

Thus, When The net income will increase by $8,000    

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