Answer:
A. $30,000 decrease
Explanation:
Ortega Industries
Direct materials $ 150,000
Direct labor 240,000
Variable manufacturing overhead 90,000
Fixed manufacturing overhead 120,000
Total Manufacturing Costs for 15000 units is $ 600,000
Total Manufacturing Costs per unit= Total Costs/ Total units= $600,000 / 15000= $ 40
An outside supplier has offered to sell the component to Ortega for $34.
Profit per unit = $ 6
Profit for 15000 units = $6*15000= $ 90,000
The fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility= $ 120,000 Which cannot be used for any other facility.
Unavoidable Fixed Costs= $ 120,000
Less Profits= $ 90,000
Decrease in operating Profits $ 30,000
If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a $30,000 decrease because after the profit of $ 90,000 cancel the effect of fixed costs of $ 90,000 the fixed costs of $ 30,000 will still be unavoidable and cannot be used for any other facility.
