Reference no: EM132543448

Question - Babalwa Industries manufactures 20 000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials R150 000

Direct labour 240 000

Inspecting products 60 000

Providing power 30 000

Providing supervision 40 000

Setting up equipment 60 000

Moving materials 20000

Total manufacturing cost R600 000

If the component is not produced by Babalwa, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for R25.50.

Required - What is the effect on income if Babalwa Industries purchases the component from the outside supplier?