We'll test your business knowledge in each issue of Lehigh Business, and give you an opportunity to win bragging rights and Lehigh swag.This Biz Quiz comes courtesy of Kenneth P. Sinclair, professor of accounting.
The Lehigh Corporation produces gas grills. Last year, it produced and sold 20,000 of them. It also has made side burners for its grills, with each grill requiring two side burners. Costs last year for the side burners were as follows:
|Direct materials (variable cost)||$200,000|
|Direct labor (variable cost)||100,000|
|Inspection, setup, material handling*||4,000|
|Allocated fixed costs of plant administration, taxes and insurance||50,000|
*Inspection, setup, and material handling costs vary with the number of batches in which the burners are produced. Lehigh Corporation produces burners in batch sizes of 1,000 units.
For the upcoming year, Lehigh Corporation has received an offer from an outside vendor to supply any number of side burners the company requires at $9.25 per burner. The chief financial officer at Lehigh Corporation (that's you) believes that only 16,000 gas grills will be sold during the upcoming year. Accordingly, production will be cut back. At this lower output, it will still produce the burners in batches of 1,000 units each. The company currently rents the machine used to make the side burners. If Lehigh Corporation buys all its burners from the outside vendor, it does not need to pay rent on this machine.
In the upcoming year, what increase or decrease, if any, would purchasing the burners from the outside vendor have on the company's net operating income rather than making the burners?
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You can win bragging rights—and some cool Lehigh swag. Submit your answer to email@example.com by Jan. 1, 2017. We'll post the correct answer on lehigh.edu/lehighbusiness by Jan. 15, 2017. One winner will be randomly selected from all the correct submissions.
Our random winner in our inaugural issue was Lew Chasalow '78, '79G, '82G. Congratulations!