Problem 1: RED Industries manufactures 20,000 components per year. The manufacturing cost per component was determined to be as follows:
Direct materials $30,000
Direct labor 45,000
Variable manufacturing overhead 10,000
Fixed manufacturing overhead 35,000
Total $120,000
An outside supplier has offered to sell the component for $5.25.
If RED Industries purchases the component from the outside supplier, the effect on income would be a
a. $15,000 decrease.
b. $20,000 decrease.
c. $15,000 increase.
d. $35,000 increase.
Problem 2: BG Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined to be as follows:
Direct materials $50,000
Direct labor 80,000
Variable manufacturing overhead 30,000
Fixed manufacturing overhead 40,000
Total $200,000
Assume BG Industries could avoid $15,000 of fixed manufacturing overheads if it purchases the component from an outside supplier. If BG purchases the component from a supplier for $4.25 per unit instead of manufacturing it, the effect on income would be a
a. $5,000 increase.
b. $15,000 increase.
c. $25,000 decrease.
d. $35,000 increase.
Problem 3: Salish Industries manufactures a product with the following costs per unit at the expected production of 60,000 units:
Direct materials $8
Direct labor 15
Variable manufacturing overhead 10
Fixed manufacturing overhead 12
The company has the capacity to produce 70,000 units. The product regularly sells for $60. A wholesaler has offered to pay $55 each for 5,000 units.
If the special order is accepted, the effect on operating income would be a
a. $42,000 decrease
b. $67,000 increase
c. $110,000 increase
d. $182,000 decrease
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