Question
Whole Pine Inc. presently manufactures and assembles all the parts for its toy truck product. Another company has offered to sell the parts to Whole
Whole Pine Inc. presently manufactures and assembles all the parts for its toy truck product. Another company has offered to sell the parts to Whole Pine Inc. for $2.00 per unit. Whole Pine Inc. is considering this offer. If Whole Pine Inc. buys the parts instead of making them, the space used in producing the parts could be used for a new product line, which is scheduled to begin production next year. If Whole Pine Inc. continues to produce the parts itself, then Whole Pine Inc. will have to rent manufacturing space from another company in an adjacent building for the new product line. The rent that Whole Pine Inc. would have to pay for this rental space would be $5,000 per year.
Below is the cost information related to the production of the toy truck parts:
Direct materials | $1.10 |
Direct labor | 0.30 |
Variable manufacturing overhead | 0.20 |
Fixed manufacturing overhead | 0.20 |
Total manufacturing costs | 1.80 |
The marketing department has estimated that sales for the toy truck will be approximately 20,000 units per year. The fixed manufacturing overhead is indirect and will still be incurred regardless of which decision is made.
By how much will Whole Pines net income change if it decides to stop making the parts itself and instead buys the parts from the other company?
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