Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: $\begin{array}{lr}
\text { Direct materials } & £ 10 \
\text { Direct labour } & 14 \
\text { Variable overhead } & 6 \
\text { Fixed overhead } & 83 \
\text { Total unit cost } & £ 38
\end{array}$
Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32.

Required:
a.What is the effect on income if Solomon purchases the component from the outside supplier?
b.Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

Question

Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: $\begin{array}{lr}
\text { Direct materials } & £ 10 \
\text { Direct labour } & 14 \
\text { Variable overhead } & 6 \
\text { Fixed overhead } & 83 \
\text { Total unit cost } & £ 38
\end{array}$ 
Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32.

Required:
a.What is the effect on income if Solomon purchases the component from the outside supplier?
b.Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

Quizplus · Accepted Answer

The Answer of Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: $\begin{array}{lr}
\text { Direct materials } & £ 10 \
\text { Direct labour } & 14 \
\text { Variable overhead } & 6 \
\text { Fixed overhead } & 83 \
\text { Total unit cost } & £ 38
\end{array}$ 
Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32.

Required:
a.What is the effect on income if Solomon purchases the component from the outside supplier?
b.Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

Solomon Company Manufactures 20,000 Components Per Year Assume That the Fixed Overhead Reflects the Cost of Solomon's