Kawai corporation, which makes and sells 85,000 radios annually, currently purchases the radio speakers it uses for $8.00 each. each radio uses one speaker. the company has idle capacity and is considering the possibility of making the speakers that it needs. kawai estimates that the cost of materials and labor needed to make speakers would be a total of $6.50 for each speaker. in addition, supervisory salaries, rent, and other manufacturing costs would be $170,000. allocated facility-level costs would be $75,000. required determine the change in net income kawai would experience if it decides to make the speakers.

Effect on income= $-117,500

Explanation:

Giving the following information:

Kawai Corporation, which makes and sells 85,000 radios annually, currently purchases the radio speakers it uses for $8.00 each.

Kawai estimates that the cost of materials and labor needed to make speakers would be a total of $6.50 for each speaker. Also, supervisory salaries, rent, and other manufacturing costs would be $170,000. Allocated facility-level costs would be $75,000.

Buy= 85000*8= $680,000

In house:

Production costs= 6.5*85,000 + 75,000= 627,500

Other fixed costs= 170,000

Total cost= $797,500

Effect on income= 680,000 - 797,500= $-117,500

Net income will belowerselected answer correctby$(42,500)selected answer correct

Explanation:

Solution :

Total material and labor cost ( 85,000 x $6.50)$552,500

Add : supervisor salary, rent & manufacturing costs$170,000

Add: Allocated costs ( see note)

Total manufacturing cost speakers$722,500

Less : existing purchasing cost ( 85,000 x $8)$680,000

Net income will be lower by$42,500

Note : allocated costs is not an additional costs, this is the cost which is incurred by kawal corporation even if it purchases speakers for market.

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