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O decrease by $1,000 O decrease by $4,000 O increase by $1,000 O increase by $3,500

O decrease by $1,000 O decrease by $4,000 O increase by $1,000 O increase by $3,500

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Cost Analysis of Producing Component X72 In-house Versus Outsourcing** This exercise examines the cost implications of making component X72 in-house versus outsourcing production to a supplier. ### In-house Production Costs: - **Total Unit Cost**: $16/unit - Direct Materials: $7/unit - Direct Labor: $3/unit - Variable Overhead: $1/unit - Fixed Overhead: $5/unit ### Outsourcing Offer: - **Supplier Price**: $12/unit ### Calculation Objective: Determine the impact on profit if production of 1,000 units per month is outsourced. ### Cost Comparison: 1. **In-house Production Cost** for 1,000 units: - 1,000 units * $16/unit = $16,000 2. **Outsourcing Cost** for 1,000 units: - 1,000 units * $12/unit = $12,000 3. **Fixed Costs Savings**: Outsourcing avoids fixed overhead costs. - Fixed Overhead: $5,000 (1,000 units * $5/unit) ### Profit Impact Calculation: - **Total Cost Savings from Outsourcing**: \( \text{(Current In-house Cost - Outsourced Cost + Fixed Cost Savings)} \) - ($16,000 - $12,000 + $5,000) = $9,000 ### Profit Change in Short Term: - **Profit Increase by $9,000** **Answer Choices for Impact on Profit:** - Decrease by $1,000 - Decrease by $4,000 - Increase by $1,000 - Increase by $3,500 - Increase by $12,000 **Correct Answer**: The profit will increase by $9,000, which is not listed among the answer choices.
Transcribed Image Text:**Cost Analysis of Producing Component X72 In-house Versus Outsourcing** This exercise examines the cost implications of making component X72 in-house versus outsourcing production to a supplier. ### In-house Production Costs: - **Total Unit Cost**: $16/unit - Direct Materials: $7/unit - Direct Labor: $3/unit - Variable Overhead: $1/unit - Fixed Overhead: $5/unit ### Outsourcing Offer: - **Supplier Price**: $12/unit ### Calculation Objective: Determine the impact on profit if production of 1,000 units per month is outsourced. ### Cost Comparison: 1. **In-house Production Cost** for 1,000 units: - 1,000 units * $16/unit = $16,000 2. **Outsourcing Cost** for 1,000 units: - 1,000 units * $12/unit = $12,000 3. **Fixed Costs Savings**: Outsourcing avoids fixed overhead costs. - Fixed Overhead: $5,000 (1,000 units * $5/unit) ### Profit Impact Calculation: - **Total Cost Savings from Outsourcing**: \( \text{(Current In-house Cost - Outsourced Cost + Fixed Cost Savings)} \) - ($16,000 - $12,000 + $5,000) = $9,000 ### Profit Change in Short Term: - **Profit Increase by $9,000** **Answer Choices for Impact on Profit:** - Decrease by $1,000 - Decrease by $4,000 - Increase by $1,000 - Increase by $3,500 - Increase by $12,000 **Correct Answer**: The profit will increase by $9,000, which is not listed among the answer choices.
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