Question
The Roosevelt Company presently makes 27,000 units of a certain component each year for use on its production line. The cost per unit for the
The Roosevelt Company presently makes 27,000 units of a certain component each year for use on its production line. The cost per unit for the component at this level of activity is as follows
Direct materials.................................$4.20
Direct Labor.....................................$12.00
Variable factory overhead................. $5.80
Fixed factory overhead......................$6.50
Roosevelt has received an offer from an outside supplier who is willing to provide 27,000 units of this component at a price of $25 per component. Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed factory overhead could be avoided and the facilities now being used to make the component could be rented to another company for $64,800 per year. If Roosevelt chooses to buy the component from the outside supplier under these circumstances, how much would annual net income increase or decrease by?
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