Clemente Inc. incurs the following costs to produce 10,000 untis of a subcomponent

Direct Materials: $28,000
Direct Labor: $37,500
Variable Overhead: $42,000
Fixed Overhead: $54,000

An outside supplier has offerend to sell Clemente the subcomponent for $9.50 a unit.

1. If Clemente accepts the offer, by how much will net income increase (decrease)?

2. If Clement could avoid $10,000 of fixed overhead by accepting the offer, net income would increase (decrease) by how much?

3. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $12,000. The increase (decrease) in net income from accepting the offer would be how much?

Thanks.

If you have already attempted to do any part of this, please post what you have. We're not here just to answer your problems for you. This is a long problem and it would take a lot of "hints" to try to work you through it without actually just doing it for you. I find a lot of times people have actually done some of the work but don't bother to post it.

Or ask specifically where you're stuck.

I don't even know where to begin with this problem.

1. If Clemente accepts the offer, by how much will net income increase (decrease)?

Having troubles eh?

Let's look at how much it costs for them to produce this on their own.

They produce 10,000 units with the following costs:
Direct Materials: $28,000
Direct Labor: $37,500
Variable Overhead: $42,000
Fixed Overhead: $54,000

Total Costs = 161,500
Divide by 10,000 Units
Cost per unit = 16.15

The offer is to buy at 9.50/unit.

Therefore, they will save $6.65 per unit, or 6.65 x 10,000 = $66,500 if they accept the offer.



2. If Clement could avoid $10,000 of fixed overhead by accepting the offer, net income would increase (decrease) by how much?

Under part 1, the net income rises by 66,500. If they 10,000 cost is also eliminated, then net income will rise by 76,500



3. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $12,000. The increase (decrease) in net income from accepting the offer would be how much?

Net Income from part 1, 66,500
Plus additional income of 12,000
Total = 78,500