Ortiz Co.produces 5,000 units of part A12E.The following costs were incurred for that level of production: $$\begin{array} { l r }
\text { Direct materials } & \$ 55,000 \
\text { Direct labor } & 160,000 \
\text { Variable overhead } & 75,000 \
\text { Fixed overhead } & 175,000
\end{array}$$ If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.
-If the outside supplier offers a unit price of $68, net income will increase (decrease) by

Question

Ortiz Co.produces 5,000 units of part A12E.The following costs were incurred for that level of production: $$\begin{array} { l r } 
\text { Direct materials } & \$ 55,000 \
\text { Direct labor } & 160,000 \
\text { Variable overhead } & 75,000 \
\text { Fixed overhead } & 175,000
\end{array}$$ If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.
-If the outside supplier offers a unit price of $68, net income will increase (decrease) by

Quizplus · Accepted Answer

If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. So, the total cost of buying the part from an outside supplier would be $68 * 5,000 + $40,000 = $380,000. The total cost of producing the part in-house is $55,000 + $160,000 + $75,000 + $175,000 = $465,000. Therefore, net income will increase by $380,000 - $465,000 = $85,000.

Ortiz CoProduces 5,000 Units of Part A12E If Ortiz Buys the Part from an Outside Supplier, $40,000