Chetek Industries manufactures 15,000 components per year. The manufacturing cos

Question

Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows:

Assume that the fixed manufacturing overhead reflects the cost of Chetek's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Chetek for $34. If Chetek Industries purchases the component from the outside supplier, the effect on income would be a:

A. $30,000 decrease

B. $30,000 increase

C. $90,000 decrease

D. $90,000 increase

Direct Materials $150,000 Direct Labor 240,000 Variable manufacturing overhead 90,000 Fixed manufacturing overhead 120,000 Total $600,000

Explanation / Answer

If produce from Chetak's Factory If component purchased from outside Number of Components produced 15000 15000 Total cost incurred 6,00,000 (15000*34)+1,20,000 = 6,30,000 Difference 6,00,000-6,30,000 = -30,000 Result will be if chetak industires purchase the component from outside suppliers the effect on income would be decreesed by $30,000 Because chetak's fixed overhead will be there, if they are produced or not. So we need to consider those amounts as part cost when they are purchased from out siders.

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