@agile 321,
I think the answer is Decrease $5000. But the answer says Increase $5000 for some reason. See below for explanation.
“The product should be produced if the incremental cost to produce the product, including any opportunity cost of idle facilities, is less than the purchase price.
Since the fixed plant charge will not change due to this decision, it is irrelevant and should not be considered. The direct materials and direct labor costs ($40,000 + $30,000 = $70,000) are relevant costs. These incremental costs total $70,000 per month to make the product, while they can buy the part for $80,000 per month, an increase in monthly costs of $10,000.
However, the rental income from renting the idle capacity of $5,000 reduces the monthly cost of purchasing the parts, for a net increase in monthly income before taxes of $5,000.”
Notice how it says ‘net increase', I think it should say ‘net decrease'.
Can Jeff clarify this one?
AUD - 91
BEC - 84
FAR - 91
REG - 91
.