Question

Ortega Industries manufactures 20,950 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials $ 184,000 Direct labor 410,000 Variable manufacturing overhead 107,000 Fixed manufacturing overhead 290,000 Total $ 991,000 Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a:

Answer 1

Increase in costs by buying= $11,300

Step-by-step explanation:

Giving the following information:

Ortega Industries manufactures 20,950 components per year.

Direct materials $ 184,000

Direct labor 410,000

Variable manufacturing overhead 107,000

Fixed manufacturing overhead 290,000

Total of $ 991,000

This facility cannot be used for any other purpose.

An outside supplier has offered to sell the component to Ortega for $34.

We will not have into account the fixed MOH cost, because it exists in both options.

Make in house total cost= 701,000

Buy= 34* 20950= 712,300

Increase in costs by buying= 712,300 - 701,000= $11,300