Frannie Fans currently manufactures ceiling fans that include remotes to operate them. The current cost to manufacture 10,000 remotes is as follows:
Cost
Direct materials ……………….. $65,000
Direct labor ……………………… $55,000
Variable overhead ……………. $30,000
Fixed overhead ………………… $50,000
Total ………………………………. $200,000
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? Should managers make or buy the remotes?
2. Compute the difference in cost between making and buying the remotes if $20,000 of the fixed costs can be avoided. What is the change in net income? Should managers make or buy the remotes?
3. What is the change in net income if fixed cost of $20,000 can be avoided and Frannie could rent out the factory space no longer in use for $20,000? Should managers make or buy the remotes?
