Question

Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials $ 75,000 Direct labor 120,000 Variable overhead 45,000 Fixed overhead 60,000 Total $300,000 An outside supplier has offered to sell the component for $12.75. Fixed cost will remain the same if the component is purchased from an outside supplier. Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier. What is the effect on income if Vest purchases the component from the outside supplier

Answer 1

If the company buys the component, income will decrease by $225,000.

Step-by-step explanation:

Giving the following information:

Units= 40,000

The manufacturing cost:

Direct materials $ 75,000

Direct labor 120,000

Variable overhead 45,000

An outside supplier has offered to sell the component for $12.75.

Vest Industries can rent its unused manufacturing facilities for $45,000.

We will take into account only the differential costs.

Make in -house:

Total cost= 75,000 + 120,000 + 45,000= $240,000

Buy:

Total cost= 40,000*12.75 - 45,000= $465,000

If the company buys the component, income will decrease by $225,000.