Normal production is 50000 bicycles per year A supplier offers to make the

Normal production is 50000 bicycles per year a

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Normal production is 50,000 bicycles per year. A supplier offers to make the bicycle seats at a price of \$20 each. If the bicycle company accepts this offer, all variable
manufacturing costs will be eliminated, but the \$30,000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. Instructions
(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. (b) Should Moon Bicycle Company buy the seats from the outside supplier? Justify your answer.
Solution 174 (15–20 min.) (a) Net Income Make Buy Increase (Decrease) Direct Materials (50,000 × \$8) \$ 400,000\$ -0-\$ 400,000
Direct Labor (50,000 × \$9) 450,000 -0-450,000 Variable Manufacturing Costs (\$450,000 × 60%) 270,000 -0-270,000 Fixed Manufacturing Costs 30,00030,000-0- Purchase Price (50,000 × \$20) -0-
1,000,000 (1,000,000 ) Total annual cost \$1,150,000 \$1,030,000 \$ 120,000 (b) The seats should be purchased from the outside supplier. As indicated, the company's net
income would increase \$120,000 by purchasing the seats. Ex. 175 United Chemical Corporation produces an oil- based chemical
product which it sells to paint manufacturers. In 2008, the company incurred \$344,000 of costs to produce 40,000 gallons of the chemical. The selling price of the chemical is \$11.00 per gallon. The costs per unit to manufacture a gallon
of the chemical are presented below: Direct materials \$6.00 Direct labor1.20 Variable manufacturing overhead .80 Fixed manufacturing overhead .60
Total manufacturing costs \$8.60 The company is considering manufacturing the paint itself. If the company processes the chemical further and manufactures the paint itself, the
following additional costs per gallon will be incurred: Direct materials \$1.70, Direct labor \$.60, Variable manufacturing overhead \$.50. No increase in fixed manufacturing overhead is expected. The company can
sell the paint at \$15.00 per gallon. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company
manufactures the paint. Solution 175 (15–20 min.) Net Income Sell Chemical Process
Further Increase (Decrease) Sales price per unit \$11.00 \$15.00 \$4.00 Cost per unit: Direct materials (A) 6.00 7.70(1.70) Direct labor (B)1.20 1.80 (.60) Variable manufacturing
overhead (C).801.30 (.50) Fixed manufacturing overhead .60 . 60 Total 8.60 11.40 (2.80 ) Net income per unit \$ 2.40 \$ 3.60 \$1.20
Solution 175 (cont.) (A)\$6.00 + \$1.70 (B) \$1.20 + \$.60 (C) \$.80 + \$.50 Assuming the company sells all 40,000 gallons that it produces, the incremental net income would be
\$48,000 (40,000 gallons × \$1.20).

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