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By how much will income from operations increase or decrease

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Question - Autoshop Limited is currently manufacturing Part ZZZ. It produces 50,000 units of Part ZZZ annually. This part is used in the manufacturing of many products produced by Autoshop Limited. The breakdown of the cost per unit for ZZZ is shown below.

Direct Materials $5.00

Direct Labour $1.50

Variable Overhead $3.00

Fixed Overhead $4.00

Unit Cost $13.50

The fixed overhead cost (at $4/unit) would still remain with the company even if Autoshop stops manufacturing Part ZZZ. An outside supplier has offered to sell the same part to Autoshop for $12 per unit.

Currently, there is no alternative use for the capital assets used to produce Part ZZZ. These capital assets will not be sold if the firm chooses to buy Part ZZZ.

Required -

1. Should Autoshop Limited make or buy Part ZZZ?

2. If Autoshop buys the part for $12 instead of making it, by how much will income from operations increase or decrease?

Reference no: EM133096786

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