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:

Question

Arabella Parrish

Business

18 November, 13:00

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:

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Answers (1)

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Michael Barber · Answer 1

Decrease in net operating income = $14,400

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