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.Fixed costs will remain the same if the component is purchased from an outside supplier.
What is the effect on income if Vest Industries purchases the component from the outside supplier?

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.Fixed costs will remain the same if the component is purchased from an outside supplier.
What is the effect on income if Vest Industries purchases the component from the outside supplier?

Quizplus · Accepted Answer

Vest Industries incurs a manufacturing cost of $11 per component, so their total cost for producing 40,000 components is:

Total cost = 40,000 x $11 
Total cost = $440,000

If the company purchases the component from the outside supplier for $12.75 per unit, their total cost for 40,000 components will be:

Total cost = 40,000 x $12.75 
Total cost = $510,000

Therefore, the cost of purchasing the components from the outside supplier will increase Vest Industries' costs by $70,000 ($510,000 - $440,000). Since fixed costs remain the same, this increase in costs will result in a decrease in income of $270,000 ($70,000 x 3.86, assuming a tax rate of 38.6%).

Vest Industries Manufactures 40,000 Components Per Year