Question

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials $150,000 Direct labor 240,000 Variable manufacturing overhead 90,000 Fixed manufacturing overhead 120,000 Total $600,000 An outside supplier has offered to sell the component to Ortega for $34. Assume that the the fixed manufacturing overhead is common fixed overhead. Which means that the fixed overhead would remain the same even if the company decides to buy the component from an outside supplier. If Ortega Industries purchases the component from the outside supplier, the effect on income would be a: $30,000 increase. $30,000 decrease. $90,000 increase. $90,000 decrease.

Answer 1

$30,000 decrease

Step-by-step explanation:

The computation is shown below:

In the case when the production is done from Chetak's Factory

Number of Components produced 15000 15000

Total cost incurred $600,000

In the case when the production is done from outside

Number of Components produced 15,000

Total cost spend $630,000 ((15,000 × 34) + $120,000)

S the difference is

= $600,000 - $630,000

= -$30,000

Therefore the second option is correct