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Annual requirement of component

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Blanrin Inc. currently produces all the components for the products it makes and sells. The total costs of producing a component, Components Y, for one of its products are given below. The annual requirement of Component Y is 2,200 units.

Direct materials

$19,800

Direct labor

11,000

Variable manufacturing overhead

15,400

Fixed manufacturing overhead

13,200

An external supplier offers to sell the component to Blanrin Inc. for $23 per unit. After analysis, it is found that if the company buys the component instead of producing it, all of its variable costs and $8,200 of its fixed overhead costs will be eliminated. If Blanrin Inc. decides to buy the component instead of manufacturing it, how will the decision affect the company?

  • Its net income will decrease by $3,800.
  • Its net income will increase by $8,200.
  • Its net income will increase by $4,400.
  • Its net income will increase by $3,800

Reference no: EM131411813

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