Blanrin Inc. currently produces all the components for the products it makes and sells. The total costs of producing a component, Components Y, for one of its products are given below. The annual requirement of Component Y is 2,200 units.
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Direct materials
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$19,800
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Direct labor
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11,000
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Variable manufacturing overhead
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15,400
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Fixed manufacturing overhead
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13,200
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An external supplier offers to sell the component to Blanrin Inc. for $23 per unit. After analysis, it is found that if the company buys the component instead of producing it, all of its variable costs and $8,200 of its fixed overhead costs will be eliminated. If Blanrin Inc. decides to buy the component instead of manufacturing it, how will the decision affect the company?
- Its net income will decrease by $3,800.
- Its net income will increase by $8,200.
- Its net income will increase by $4,400.
- Its net income will increase by $3,800