Moonbeam Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows: Direct Materials $ 15,000 Direct Labor 5,000 Variable Overhead 6,000 Fixed Overhead 9,000 The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs

the correct answer is decrease in net income by $3,500.

Explanation:

According to the scenario, the computation of the given data are as follows:

Total cost of purchase = 175,000 * $0.18 = $31,500

Fixed overhead if bought = $9,000 - $2,000 = $7,000

So, total cost in buying = $31,500 + $7,000 = $38,500

Now if we make the product than costing can be calculated as

Cost in making = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead

= $15,000 + $5,000 + $6,000 + $9,000

= $35,000

So, Increase or decrease net income = total cost in making - total cost in buying

= $35,000 - $38,500

= - $3,500 (Negative shows the decrease in net income)