Mason Company makes portable charges for cell phones. Currently, Mason purchases 10,000 plastic housings a year from an outside company for $1 each. One of Mason engineers suggested that the company make its plastic housings in-house. Estimated unit costs are as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 0.30 \
\text { Direct labour } & 0.20 \
\text { Variable overhead } & 0.15 \
\text { Fixed overhead* } & 0.40
\end{array}$$ * Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs to be allocated to this line.
Required:
A. If Mason makes the housing in-house, will net income be higher or lower, and by how much?
B. What is the highest price per unit that Mason would pay an outside company for the housings?
C. Now assume that all of the fixed overhead is allocated fixed overhead and will not be affected by making the product in-house or purchasing it. If Mason makes the housing in-house, will net income be higher or lower, and by how much?

Question

Mason Company makes portable charges for cell phones. Currently, Mason purchases 10,000 plastic housings a year from an outside company for $1 each. One of Mason engineers suggested that the company make its plastic housings in-house. Estimated unit costs are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 0.30 \
\text { Direct labour } & 0.20 \
\text { Variable overhead } & 0.15 \
\text { Fixed overhead* } & 0.40
\end{array}$$ * Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs to be allocated to this line.
Required:
A. If Mason makes the housing in-house, will net income be higher or lower, and by how much?
B. What is the highest price per unit that Mason would pay an outside company for the housings?
C. Now assume that all of the fixed overhead is allocated fixed overhead and will not be affected by making the product in-house or purchasing it. If Mason makes the housing in-house, will net income be higher or lower, and by how much?

Quizplus · Accepted Answer

The Answer of Mason Company makes portable charges for cell phones. Currently, Mason purchases 10,000 plastic housings a year from an outside company for $1 each. One of Mason engineers suggested that the company make its plastic housings in-house. Estimated unit costs are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 0.30 \
\text { Direct labour } & 0.20 \
\text { Variable overhead } & 0.15 \
\text { Fixed overhead* } & 0.40
\end{array}$$ * Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs to be allocated to this line.
Required:
A. If Mason makes the housing in-house, will net income be higher or lower, and by how much?
B. What is the highest price per unit that Mason would pay an outside company for the housings?
C. Now assume that all of the fixed overhead is allocated fixed overhead and will not be affected by making the product in-house or purchasing it. If Mason makes the housing in-house, will net income be higher or lower, and by how much?

Mason Company Makes Portable Charges for Cell Phones * Fixed Overhead Is $2,400 Per Year in Equipment Costs