Averette & Averette Averette & Averette, a local dental practice, currently makes its own dentures for customers. The dental practice has one part-time employee who comes in weekly to make dentures. The employee is paid $150 per denture set. The direct materials and variable overhead cost per set of dentures is $75 and $25, respectively. In addition, the practice allocates $10,000 of fixed overhead to the denture-making department. The practice makes 1,000 sets of dentures per year. An outside company who specializes in the making of dentures has offered to make each set of dentures for Averette & Averette for $255 per set.
Refer to the Averette & Averette information above. If Averette & Averette outsources the making of dentures, the net income will:

Question

Quizplus · Accepted Answer

If Averette & Averette outsources, the cost per denture set will be $255. Currently, the cost per set is $150 (labor) + $75 (materials) + $25 (variable overhead) = $250. The fixed overhead of $10,000 is irrelevant as it will be incurred regardless. Outsourcing increases the cost by $5 per set for 1,000 sets, leading to a $5,000 decrease in net income.

Averette & Averette Averette & Averette, a Local Dental Practice