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Namaste, Inc. makes a line of bathroom accessories. A decline in sales has left the organization...

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Accounting

Namaste, Inc. makes a line of bathroom accessories. A decline insales has left the organization with 10,000 machine hours of idlecapacity at their disposal each year. This idle capacity could beused by the company to manufacture, rather than buy, one of thepieces used in its production process. Namaste needs 5,000 units ofthis component each year. This component is currently beingpurchased from an outside supplier at $7.50 per unit. Variableproduction cost for the component is $4.10 per unit, and additionalsupervisory costs are $18,000 per year. Already existing fixedcosts that would be allocated to this part come to a total of$300,000 per year.

How much would the company's overall annual NOI increase/decreaseas a result of making the component, rather than purchasing it?

Answer & Explanation Solved by verified expert
4.0 Ratings (768 Votes)

Statement Showing Inccremental Analysis
Make Buy Difference
Variable production cost (5000 * 4.10)                             20,500
Additional supervisory cost                             18,000
Purchase cost (5000 X 7.50)        37,500
Total relevant cost                             38,500        37,500         1,000
NOI Will decreased by $1000 as result of making the product instead of Buy it
Dear student , Let me know if any doubt in solution, kindly mark positive rating it would help me lot.

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