XYZ Company makes 400 widgets. The variable costs are $38.00 per unit and fixed costs are $32.40 per unit; however, $23.80 in fixed costs per unit is unavoidable. What is the effect on net income if the company instead buys the widgets from an outside supplier for $50.00 per unit?

Decrease in net income by $1,360

Explanation:

First, we need to prepare analysis of costs and savings if the company buys outside.

Please note that the fixed costs per unit are unavoidable and are irrelevant hence ignored in making this decision.

Analysis of costs and savings

Purchase price (400 widgets × $50 per unit) = ($20,000)

Savings:

Variable costs (400 widgets × $38 per unit) = $15,200

Fixed costs (400 widgets × $8.60 per unit) = $3,440

Net income effect

($1,360)

The effect of on net income if the company buys widget from outside is a decrease in net income by $1,360

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