Question

Due to a labor strike, Clifford is considering purchasing the subcomponents from an outside supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded by the union. Fixed overhead is not avoidable. If Clifford purchases the subcomponent from the outside supplier, how much will profit differ from what it would be if it manufactured the subcomponents with the increase in direct labor cost?

Answer 1

Answer:

c. $10,000 more

Explanation:

Cost will be $250 ×2,000 = $500,000

if purchased from the outside supplier

($60 + $110 + $75) ×2,000 = $490,000 if manufactured

$500,000 -$490,000 =$10,000

Therefore profit is $10,000 less if purchased from the outside supplier and it will be $10,000 more if manufactured.