Question

AlphaBrona Industries manufactures 50,000 components per year. The manufacturing cost of the components was determined as follows:Direct materials$ 80,000Direct labor100,000 Variable overhead 30,000 Fixed overhead 60,000Total$270,000An outside supplier has offered to sell the component for $10. Fixed costs will remain the same if the component is purchased from an outside supplier.What is the effect on income if AlphaBrona Industries purchases the component from the outside supplier

Answer 1

Answer: -$290,000

Explanation:

The income would reduce by $290,000 if purchased from an outside supplier.

$270,000 is the cost of manufacturing 50,000 components per year.

Should they buy from outside it would cost $10 per component which would come to $500,000.

Fixed costs remain the same so we add that to the cost of purchasing outside.

$500,000 + $60,000 = $560,000

Total cost of purchasing from outside is $560,000.

The difference between the costs is =$560,000 - $270,000

= $290,000

This difference in cost would have to be accounted for from income so if purchased from outside, the income will reduce by $290,000.