Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic components for the humidifier itself. When 10 000 units are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr}
\text { Direct materials } & \$ 6 \
\text { Direct labour } & 8 \
\text { Variable overhead } & 7 \
\text { Fixed overhead } & 9
\end{array}$

McClintock Inc. has offered to sell Compton 10 000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently allocated to the motors could be avoided.
-If Compton accepts the offer to purchase 10 000 motors from McClintock,net income will:

Question

Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic components for the humidifier itself. When 10 000 units are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr}
\text { Direct materials } & \$ 6 \
\text { Direct labour } & 8 \
\text { Variable overhead } & 7 \
\text { Fixed overhead } & 9
\end{array}$

McClintock Inc. has offered to sell Compton 10 000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently allocated to the motors could be avoided.
-If Compton accepts the offer to purchase 10 000 motors from McClintock,net income will:

Quizplus · Accepted Answer

If Compton accepts the offer to purchase 10,000 motors from McClintock, they will have to incur a cost of $200,000 (10,000 motors x $20 per motor). However, this cost will be offset by the increase in revenue from the sale of these motors. The selling price per motor is $35, so the total revenue generated will be $350,000 (10,000 motors x $35 per motor).

The variable cost per motor is $10, so the total variable cost will be $100,000 (10,000 motors x $10 per motor). Thus, the contribution margin will be $250,000 ($350,000 - $100,000).

The fixed costs will remain the same at $150,000.

Therefore, the net income will be $100,000 ($250,000 - $150,000).

Currently, the net income is $72,500 ($150,000 - $77,500).

Thus, if Compton accepts the offer to purchase 10,000 motors from McClintock, the net income will increase by $27,500 ($100,000 - $72,500).

Compton Products Inc McClintock Inc