Question
Baron Company incurs the following annual costs in producing 25,000 ignition switches for motor scooters: Direct materials $50,000 Direct labor 75,000 Variable manufacturing overhead 40,000
Baron Company incurs the following annual costs in producing 25,000 ignition switches for motor scooters: Direct materials $50,000 Direct labor 75,000 Variable manufacturing overhead 40,000 Fixed manufacturing overhead 60,000 Total manufacturing costs $225,000 Total cost per unit ($225,000/25,000 units) $9 Alternatively, Baron Company may purchase the ignition switches from Ignition, Inc. at a price of $8 per unit. Assume that only $10,000 of Barons fixed manufacturing overhead will be eliminated if Baron chooses to purchase the units from Ignition, Inc. Question-What will be the effect on Barons net operating income if it decides to purchase the units from Ignition, Inc. rather than make them internally? Specify whether net operating income will increase or decrease or not change (if increase or decrease, specify the amount of increase or decrease).
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