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, they will incur a cost of $23.50 per unit, which results in a total cost of $470,000 (20,000 x $23.50). This is $80,000 more than the current manufacturing cost of $390,000. Therefore, if Yankton Industries purchases the component from the outside supplier, their income will decrease by $80,000.

Yankton Industries Manufactures 20,000 Components Per Year