Concierge 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.
Concierge Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Concierge purchases the component from the outside supplier?
A) $195,000 increase
B) $165,000 decrease
C) $225,000 decrease
D) $135,000 increase

Question

Concierge 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.
Concierge Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Concierge purchases the component from the outside supplier?
A) $195,000 increase 
B) $165,000 decrease 
C) $225,000 decrease 
D) $135,000 increase

Quizplus · Accepted Answer

The total cost of manufacturing the components is:
$15 x 40,000 = $600,000
If Concierge purchases the component from the outside supplier, it will cost:
$12.75 x 40,000 = $510,000
Concierge can rent its unused manufacturing facilities for $45,000, so the net effect on income would be:
$600,000 - $510,000 - $45,000 = $45,000
Therefore, if Concierge purchases the component from the outside supplier, the income would decrease by $225,000 ($45,000 x 5 years). Therefore, the best choice is C.

Concierge Industries Manufactures 40,000 Components Per Year