Question

Ortega Industries manufactures 21,300 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials $ 186,000 Direct labor 420,000 Variable manufacturing overhead 108,000 Fixed manufacturing overhead 300,000 Total $ 1,014,000 Assume Ortega Industries could avoid $130,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

Answer 1

Answer:

Decrease by $10,200

Explanation:

The effect on income is shown below:-

                                    If produce from                     If component purchased

                                    Ortega Industries                           from outside

Number of Components

produced                       21,300                                          21,300

Total cost incurred       $1,014,000                                  $1,024,200

                                                                           (21,300 × $34) + $300,000

Difference =  $1,014,000 - $1,024,200

= -$10,200

The consequence would be if Ortega Industries buy the product from outside suppliers that will decrease the impact on income by $10,200

Since there will be fixed overhead of Ortega whether it's generated or not. So when they are purchased from outsiders, we need to consider those amounts as part cost.