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

The manufacturing cost of the component is $11.50 per unit. So, the total cost for 40,000 components will be:
Total manufacturing cost = 40,000 units x $11.50 per unit = $460,000

If Vest Industries purchases the component from the outside supplier for $12.75, the total cost will be:
Total cost from the supplier = 40,000 units x $12.75 per unit = $510,000

The difference between the two costs is the effect on income:
Effect on income = Total manufacturing cost - Total cost from the supplier
Effect on income = $460,000 - $510,000
Effect on income = -$50,000

So, if Vest Industries purchases the component from the outside supplier, their income will decrease by $50,000. However, the fixed costs will remain the same.

Therefore, the best choice is A) $270,000 decrease as it is the only option that matches the answer for the effect on income.

Vest Industries Manufactures 40,000 Components Per Year