Exercise 612A Outsourcing decision with qualitative factors

Exercise 6-12A Outsourcing decision with qualitative factors LO 6-3 Vernon Corporation, which makes and sells 79,200 radios annually, currently purchases the radio speakers it uses for $13 each. Each radio uses one speaker. The company has idle capacity and is considering the possibility of making the speakers that it needs. Vernon estimates that the cost of materials and labor needed to make speakers would be a total of $11 for each speaker. In addition, supervisory salaries, rent, and other manufacturing costs would be $173,000. Allocated facility-level costs would be $98,400. Required a. Determine the change in net income Vernon would experience if it decides to make the speakers. Net income will be by

Solution

Costs to purchase = 79200*13= 1029600 Costs to make = (79200*11)+173000= 1044200 Net income will decrease by $14600 (1044200-1029600)