Reference no: EM133172724
Question - Industry, Inc. manufactures 15,000 components per year as one part of its production activities.
The costs to manufacture the part are as follows:
Cost A. Direct materials $150,000
Cost B. Direct labor $200,000
Cost C. Variable manufacturing overhead $90,000
Cost D. Fixed manufacturing overhead (allocated common costs) $72,000
Cost E. Fixed manufacturing costs directly traceable to this component.
(Rent on equipment used only to make this component) $48,000
Total $560,000
If Industry,Inc. is willing to outsource the production of the component, it can purchase the part from an outside supplier for $34 each or $510,000 ($34 x 15,000) .
1. Which of the manufacturing costs are relevant (which costs will change) if the manufacturing of the component is outsourced to an outside supplier? Indicate by letters for brevity.
2. If Industry purchases the component instead of manufacturing it, by how much will Industry's net income change? (Remember that you are analyzing only COSTS here, we assume revenues will not change as a result of the decision to purchase the component.) Be sure to label your numeric answer as Increase or Decrease.