AlphaBrona Industries manufactures 50,000 components per year. The manufacturing
ID: 2594615 • Letter: A
Question
AlphaBrona Industries manufactures 50,000 components per year. The manufacturing cost of the components was determined as follows:
Direct materials $ 80,000
Direct labor 100,000
Variable overhead 30,000
Fixed overhead 60,000
Total $270,000
An outside supplier has offered to sell the component for $10. Fixed costs will remain the same if the component is purchased from an outside supplier. What is the effect on income if AlphaBrona Industries purchases the component from the outside supplier?
a.$290,000 decrease b.$45,000 decrease c.$290,000 increase d.$45,000 increase
Explanation / Answer
Make:
Direct materials $80,000
Direct labor $100,000
Variable overhead $30,000
Total $210,000
Buy:
Purchase price = 50,000 x $10 = $500,000
$500,000 - $210,000 = $290,000 increase in income
Option c.$290,000 increase in income is correct answer.
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