Reference no: EM132462900
Problem - Jonathan's Golf Company (JGC) is a producer of golf clubs. Each golf club includes a metal shaft. 24,000 metal shafts were produced last year. The following is the accounting department's analysis of the cost to manufacture the shafts:
|
|
Per Unit
|
24,000 Units
|
|
Direct Material
|
$6
|
$144,000
|
|
Direct Labor
|
4
|
96,000
|
|
Variable overhead
|
1
|
24,000
|
|
Supervisor's salary
|
3
|
72,000
|
|
Depreciation of special equipment
|
2
|
48,000
|
|
Allocated general overhead
|
5
|
120,000
|
|
Totals
|
$21
|
$504,000
|
Danny's Shaft Company (DSC) has offered to sell 24,000 golf club shafts to JGC for $18 each, or a total of $432,000. If JGC accepts their offer, variable manufacturing costs will be eliminated as well as the supervisor's salary. There is no alternative use for the equipment that is being depreciated and it cannot be sold. The general overhead allocated to the shafts would be reallocated to different products if JGC buys the shafts from DSC.
By what amount will the total cost to JGC increase or decrease if they discontinue manufacturing shafts and buy them directly from DSC?
a. Total costs will decrease by $72,000 if the shafts are bought from DSC.
b. Total costs will decrease by $24,000 if the shafts are bought from DSC.
c. Total costs will increase by $96,000 if the shafts are bought from DSC.
d. Total costs will increase by $432,000 if the shafts are bought from DSC.
e. Total costs will increase by $168,000 if the shafts are bought from DSC.