Question

Damon Industries manufactures 10,000 components per year. The manufacturing costs of the components was determined as follows: Direct materials $ 104,000 Direct labor 15,500 Variable manufacturing overhead 55,000 Fixed manufacturing overhead 75,000 An outside supplier has offered to sell the component for $20. If Damon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $11,100. If Damon purchases the component from the supplier instead of manufacturing it, the effect on operating profits would be a:

Answer 1

Decrease in net operating income= $14,400

Step-by-step explanation:

Giving the following information:

Damon Industries manufactures 10,000 components per year.

Direct materials $ 104,000 (10.4 unitary)

Direct labor 15,500 (1.55 unitary)

Variable manufacturing overhead 55,000 (5.5 unitary)

Fixed manufacturing overhead 75,000

Total cost= $249,500

Buy option:

P*Q= 20*10000= $200,000

Fixed costs= 75000

Rent= 11,100 (-)

Total cost= $263,900

Increase in costs= 263900 - 249500= $14,400