Tela Company makes a 3-in-1 product that combines a printer, fax machine, and copier for home use. Currently, Tela makes all components of the 3-in-1 machine in-house. An outside company has offered to supply one component, part number B48, for $8 each. Tela uses 15,000 of these components per year. Costs of B48 are as follows:
$\begin{array}{lr}
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 2.00 \
\text { Variable overhead } & 1.50 \
\text { Fixed overhead } & 3.00
\end{array}$
-Refer to the Figure.Assume that all of the fixed overhead is allocated and can NOT be avoided.Should Tela purchase the part from the outside supplier,and what is the financial effect?
A)No, income will decrease by $10,500.
B)No, income will decrease by $7,500.
C)Yes, income will increase by $7,500.
D)Yes, income will increase by $10,500.

Question

Tela Company makes a 3-in-1 product that combines a printer, fax machine, and copier for home use. Currently, Tela makes all components of the 3-in-1 machine in-house. An outside company has offered to supply one component, part number B48, for $8 each. Tela uses 15,000 of these components per year. Costs of B48 are as follows:
 $\begin{array}{lr}
\text { Direct materials } & \$ 4.00 \
\text { Direct labour } & 2.00 \
\text { Variable overhead } & 1.50 \
\text { Fixed overhead } & 3.00
\end{array}$
-Refer to the Figure.Assume that all of the fixed overhead is allocated and can NOT be avoided.Should Tela purchase the part from the outside supplier,and what is the financial effect?
A)No, income will decrease by $10,500.
B)No, income will decrease by $7,500.
C)Yes, income will increase by $7,500.
D)Yes, income will increase by $10,500.

Quizplus · Accepted Answer

The cost to make the part in-house is $10.50 ($4.00 + $2.00 + $1.50 + $3.00). The cost to buy is $8.00. The difference is $2.50 per unit. Since fixed overhead is unavoidable, it should not be considered in the decision. Therefore, buying the part would increase costs by $2.50 per unit, leading to a decrease in income of $37,500 (15,000 units x $2.50).

Tela Company Makes a 3-In-1 Product That Combines a Printer