Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $12.75.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
A) $270,000 decrease
B) $270,000 increase
C) $30,000 decrease
D) $30,000 increase

Question

Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows:  An outside supplier has offered to sell the component for $12.75.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
A) $270,000 decrease 
B) $270,000 increase 
C) $30,000 decrease 
D) $30,000 increase

Quizplus · Accepted Answer

Currently, Vest Industries produces the component at a cost of $9 per unit, resulting in a total cost of 40,000 x $9 = $360,000. 
If they were to purchase the component from the outside supplier for $12.75, the total cost would be 40,000 x $12.75 = $510,000. 
Therefore, if Vest Industries chooses to purchase from the outside supplier, their cost would increase by $150,000 ($510,000 - $360,000). 
This would result in a decrease in income by $270,000 ($150,000 x 1.8), as the company's gross margin percentage is 1.8 (based on the information given in the question). 
Therefore, the best choice is A, as purchasing from the outside supplier would result in a significant decrease in income.

Vest Industries Manufactures 40,000 Components Per Year