Figure 9-2
Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: $\begin{array}{lr}
\text { Direct materials } & £ 75,000 \
\text { Direct labour } & 120,000 \
\text { Variable manufacturing overhead } & 45,000 \
\text { Fixed manufacturing overhead } & 60,000 \
\text { Total } & £ 300,000
\end{array}$ An outside supplier has offered to sell the component for £12.75.
-Refer to Figure 9-2. What is the effect on income if Vest Industries purchases the component from the outside supplier?

Question

Quizplus · Accepted Answer

If Vest Industries purchases the component from the outside supplier, it will save the manufacturing cost of £300,000. The cost of purchasing the component from the outside supplier is £12.75 * 40,000 = £510,000. Therefore, the effect on income is £510,000 - £300,000 = £210,000 increase.

Figure 9-2 Vest Industries Manufactures 40,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for Manufacturing

Figure 9-2
Vest Industries Manufactures 40,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for Manufacturing