Fanning Corporation, which makes and sells 81,000 radios annually, currently purchases the radio speakers it uses for $30 each. Each radio uses one speaker. The company has idle capacity and is considering the possibility of making the speakers that it needs. Fanning estimates that the cost of materials and labor needed to make speakers would be a total of $28 for each speaker. In addition, supervisory salaries, rent, and other manufacturing costs would be $188,000. Allocated facility-level costs would be $99,100. Required Determine the change in net income Fanning would experience if it decides to make the speakers.

If the company makes the radio speakers, income will decrease by $26,000.

Explanation:

Giving the following information:

Units= 81,000 radios speakers

Purchasing price= $30 each

The cost of materials and labor= $28 for each speaker.

Supervisory salaries, rent, and other manufacturing costs would be $188,000.

The allocated facility cost is a sunk cost, it will remain constant in both decisions.

First, we need to calculate the total cost of buying and making:

Buy:

Total cost= 81,000*30= 2,430,000

Make in-house:

Total cost= 81,000*28 + 188,000= 2,456,000

If the company makes the radio speakers, income will decrease by $26,000.

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