Bonzai Company grows and sells Bonzai trees. It also makes the pot that holds the trees at a cost

of $10 per pot. The cost of the pot includes an allocation of $3 of fixed overhead. The company

makes 10,000 trees each year.

Potsdam Industries approaches Bonzai and offers to sell it pots for only $9.

Instructions

Calculate the impact that purchasing the pots from Potsdam would have on Bonzai's net income.

 

Net income will be reduced by $20000 if purchase the pots from Potsdam.

Step-by-step explanation

Cost of making pots

Variable cost(10000*$7).............$70000

Fixed overhead(10000*$3)........$30000

Total Cost.............................................$100000

Cost of Purchasing pots

Variable cost(10000*$9)..........$90000

Fixed overhead(10000*$3)......$30000

Total Cost...........................................$120000

Fixed overheads will be continued to incur even after purchasing pot.

Total Cost will be higher by $20000 ie($120000-$100000), if purchase the pots. Net income will be reduced by $20000.