Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows:
An outside supplier has offered to sell the component to Mills SA. for £35.
Required:

a.
What is the effect on income if Mills SA. purchases the component from the outside supplier?
b.
Assume that Mills SA. can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA. purchases the component from the outside supplier?

Question

Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows:
An outside supplier has offered to sell the component to Mills SA. for £35.
Required:
  
a.
What is the effect on income if Mills SA. purchases the component from the outside supplier?
b.
Assume that Mills SA. can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA. purchases the component from the outside supplier?

Quizplus · Accepted Answer

The Answer of Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows:
An outside supplier has offered to sell the component to Mills SA. for £35.
Required:
  
a.
What is the effect on income if Mills SA. purchases the component from the outside supplier?
b.
Assume that Mills SA. can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA. purchases the component from the outside supplier?

Mills SA Manufactures 50,000 Components Per Year