Answer:
a. None of these
Explanation:
As we can tell from the statement, Charleston Inc. only manufacturates this type of component, so if it stops producing it by buying it to an outside supplier, the factory will close and it will only became a trader of the component.
Given that, we have to compare the total production cost of the components (including fixed overhead) with the cost of buying them to an outside supplier:
Total production cost: $ 190.000
Total cost of outsourced components: $/u 4,25 * 40,000 Units= $ 170.000
So, if the cost decreases ( 170,000- 190,000= -20,000) in $ 20,000, the profit will increase in $ 20,000 which was not given in the possible choices. That´s why I chose a), but...
If, the factory doesn't close, the fixed overhead costs will still exist, so we only have to compare the variable costs (190,000-30,000= $ 160,000).
Variable original production cost = $160,000 vs Outsourced cost = 170,000 => the cost increase $ 10,000, so the profit decreases $10,000
But it has no sense to maintain a factory when there is no possible production so, that's why I didn't choose option b)
