Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $23.50.
What is the effect on income if Yankton Industries purchases the component from the outside supplier?
A) $20,000 increase
B) $20,000 decrease
C) $80,000 decrease
D) $80,000 increase

Question

Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:  An outside supplier has offered to sell the component for $23.50.
What is the effect on income if Yankton Industries purchases the component from the outside supplier?
A) $20,000 increase 
B) $20,000 decrease 
C) $80,000 decrease 
D) $80,000 increase

Quizplus · Accepted Answer

If Yankton Industries purchases the component from the outside supplier for $23.50, they will save $38.50 per unit on manufacturing cost ($62.00 - $23.50 = $38.50). For 20,000 units, the savings will be 20,000 x $38.50 = $770,000. Therefore, the effect on income will be a $20,000 decrease ($770,000 savings - $750,000 manufacturing cost = $20,000 decrease).

Yankton Industries Manufactures 20,000 Components Per Year