Manor,Inc.currently manufactures 1,000 subcomponents per month in one of its factories.The unit costs to produce the subcomponents are: The unit costs to produce are:
Manor is considering purchasing the subcomponents from an outside supplier,who normally charges $300 per unit.The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join,but whose members can purchase the subcomponents for $250 per unit.Fixed overhead is not avoidable.If Manor chose to purchase the subcomponents using the cheaper of the two buying options,what would be the effect on profit?

A)Decrease $25,000
B)Decrease $5,000
C)Increase $20,000
D)Increase $75,000

Question

Manor,Inc.currently manufactures 1,000 subcomponents per month in one of its factories.The unit costs to produce the subcomponents are: The unit costs to produce are:
Manor is considering purchasing the subcomponents from an outside supplier,who normally charges $300 per unit.The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join,but whose members can purchase the subcomponents for $250 per unit.Fixed overhead is not avoidable.If Manor chose to purchase the subcomponents using the cheaper of the two buying options,what would be the effect on profit?

A)Decrease $25,000 
B)Decrease $5,000 
C)Increase $20,000 
D)Increase $75,000

Quizplus · Accepted Answer

If Manor continues to manufacture the subcomponents in-house, the total cost per unit will be $280. ($160 + $60 + $60).

If they join the Exclusive Buyer's Club, they can purchase each unit for $250 which results in a saving of $30 per unit ($300 - $250). However, joining the club costs $30,000 per month which is equivalent to the cost of 1,000 units at $30 each.

Therefore, if Manor purchases the subcomponents from the outside supplier instead of manufacturing in-house, their total cost per unit will be $310 ($250 + ($30,000/1,000)).

As a result, Manor's profit per unit will decrease by $30 if they choose to purchase the subcomponents from the outside supplier.

Thus, the total decrease in profit will be $5,000 (1,000 units x $30 decrease in profit per unit).

Therefore, the best choice is B which is to purchase the subcomponents from the outside supplier, but the effect on the profit will decrease by $5,000.

Manor,IncCurrently Manufactures 1,000 Subcomponents Per Month in One of Its