Swifty Corporation incurs the following costs to produce 9900 units of a subcomponent:
1.Direct materials $8316
2.Direct labor 11187
3.Variable overhead 12474
4.Fixed overhead 16200

An outside supplier has offered to sell Swifty the subcomponent for $2.85 a unit.

If Swifty could avoid $3000 of fixed overhead by accepting the offer, net income would increase (decrease) by

The net income will increase by $6,712 if the subcomponent is purchased.

Explanation:

Giving the following information:

Swifty Corporation incurs the following costs to produce 9900 units of a subcomponent:

Direct materials $8316

Direct labor 11187

Variable overhead 12474

Fixed overhead 16200

Total cost= $48,177

An outside supplier has offered to sell Swifty the subcomponent for $2.85 a unit.

Swifty could avoid $3000 of fixed overhead by accepting the offer.

We need to calculate the total cost of buying the subcomponent:

Buy:

Total cost= 9,900*2.85 + (16,200 - 3,000)= $41,415

The net income will increase by $6,712 if the subcomponent is purchased.

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