Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,300 remotes is as follows: Cost Direct materials $ 66,950 Direct labor $ 56,650 Variable overhead $ 30,900 Fixed overhead $ 51,500 Total $ 206,000 Frannie is approached by Lincoln Company which offers to make the remotes for $18 per unit. Required: 1. Compute the difference in cost between making and buying the remotes if none of the fixed costs can be avoided. What is the change in net income? 2. Compute the difference in cost between making and buying the remotes if $20,600 of the fixed costs can be avoided. What is the change in net income? 3. What is the change in net income if fixed cost of $20,600 can be avoided and Frannie could rent out the factory space no longer in use for $20,600?

Explanation:

this is called make or buy decision, in this prblem we consider the that are directly related to product which can be avoided by purchasin g from other supplier instead producing it, fix cost irrelevant cost because they will occur whether or not company make production of items.

lets solve the problem as follows

Total Variable Cost :

Material                                66950

Labor                                    56650

Variable O.H                        30900

Total                                     154500

Remotes =  10300

Cost per unit Excluding fix cost=  154500/10300 = 15

Cost per unit Including fix cost=  206000/10300 = 20

1.cost between making and buying the remotes if none of the fixed costs can be avoided

Making Cost =                20

Buying Cost  =                18  

Differrence   =                 2

Net income If purchase from outside = 2*10300 = 20600

2. if $20,600 of the fixed costs can be avoided.

Total Cost       =  206000    

Cost avoided   =  -20600

Net Cost          =   185400

Cost per units = 185400/10300 = 18

the cost of making and buying is equal due to decrease fix cost by 20600.

Change in net income = 20600

3.

Rental Income = 20600

Fix Cost save  =20600

                           41200

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%