Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures.Current unit costs for the wheels are as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 22.00 \
\text { Direct labor } & 16.00 \
\text { Variable manufacturing overhead } & 12.00 \
\text { Fixed manufacturing overhead } & 15.00 \
\text { Total } & \$ 65.00
\end{array}$$ The company has an offer from a manufacturer to produce the wheels for $60 per wheel.If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually.In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels.If the company decides to accept the offer, what is the incremental effect on the company's net income?
A)A savings of $7,000
B)A savings of $37,000
C)A decrease in net income of $15,000
D)An increase in net income of $52,000

Question

Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures.Current unit costs for the wheels are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 22.00 \
\text { Direct labor } & 16.00 \
\text { Variable manufacturing overhead } & 12.00 \
\text { Fixed manufacturing overhead } & 15.00 \
\text { Total } & \$ 65.00
\end{array}$$ The company has an offer from a manufacturer to produce the wheels for $60 per wheel.If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually.In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels.If the company decides to accept the offer, what is the incremental effect on the company's net income?
A)A savings of $7,000
B)A savings of $37,000
C)A decrease in net income of $15,000
D)An increase in net income of $52,000

Quizplus · Accepted Answer

The cost to make the wheels is $65 per wheel, totaling $390,000 for 6,000 wheels. Buying them costs $360,000. Avoiding half of the fixed overhead saves $45,000, and renting the space adds $22,000. The net savings is $7,000.

Watson Wheels Currently Makes 6,000 Wheels Annually That Are Used