Quinton Products manufactures digital cameras.Currently,the company manufactures its own carrying case for the cameras at the following unit costs:
$\begin{array}{lr}
\text { Direct materials } &\$2.00\
\text {Direct labour } &\$2.00\
\text { Variable overhead } &\$1.00\
\text { Fixed overhead } &\$1.00\
\end{array}$

Another manufacturer has offered to supply Quinton with the case at a cost of $6 each.Quinton currently makes 9000 cases annually.If Quinton accepts the offer,what will be the short-term impact on net income?

Question

Quinton Products manufactures digital cameras.Currently,the company manufactures its own carrying case for the cameras at the following unit costs:
$\begin{array}{lr}
  \text { Direct materials } &\$2.00\
 \text {Direct labour  } &\$2.00\
 \text { Variable overhead } &\$1.00\
 \text { Fixed overhead } &\$1.00\
\end{array}$

Another manufacturer has offered to supply Quinton with the case at a cost of $6 each.Quinton currently makes 9000 cases annually.If Quinton accepts the offer,what will be the short-term impact on net income?

Quizplus · Accepted Answer

If Quinton accepts the offer, it will save $1 per case in fixed overhead, but will incur an additional $1 per case in cost ($6 offered vs $5 current cost). For 9000 cases, this results in a $9000 decrease in net income.

Quinton Products Manufactures Digital Cameras Another Manufacturer Has Offered to Supply Quinton with the Case