Figure 9-1
Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: $\begin{array}{lr}
\text { Direct materials } & £ 150,000 \
\text { Direct labour } & 240,000 \
\text { Variable manufacturing overhead } & 90,000 \
\text { Fixed manufacturing overhead } & -120,000 \
\text { Total } & £ 600,000
\end{array}$ An outside supplier has offered to sell the component for £25.50.
-Refer to Figure 9-1. What is the effect on income if Foster Industries purchases the component from the outside supplier?

Question

Quizplus · Accepted Answer

Purchasing the component from the outside supplier would cost £25.50 per unit for 20,000 units, totaling £510,000. Currently, the manufacturing cost is £600,000. Therefore, buying externally would save £90,000. However, the fixed manufacturing overhead of £120,000 would still be incurred regardless of the decision, effectively reducing the savings to £90,000 - £120,000 = -£30,000, indicating a decrease in income.

Figure 9-1 Foster Industries Manufactures 20,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for Manufacturing

Figure 9-1
Foster Industries Manufactures 20,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for Manufacturing