Foster Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows:

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount.An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?

Question

Foster Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows:
 
 If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount.An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?

Quizplus · Accepted Answer

SUPPORTING CALCULATIONS:
 
 11ea8a4c_48a7_42a9_a0e6_fd1fc197edd6_TB5550_00 $510,000 - $535,000 = $25,000 increase in income
OR
Compare total "buy" cost to total "make" cost
Buy cost = 6,000 + 3,000 + 16,000 + 40,000 + 510,000 = 575,000
 
Make cost = 600,000

Foster Industries Manufactures 20,000 Components Per Year