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What will be the effect on net income

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Question - Muscat Inc. has been manufacturing its own Camera for its Mobile Phone. The company is currently operating at 100% of capacity. Variable manufacturing overhead cost is OMR 3 per unit. The direct materials and direct labor cost per unit to make the camera are OMR 4 and OMR 6, respectively, fixed cost is OMR 50,000. Normal production is 50,000 Mobile Phone per year.

A supplier offers to make the Cameras at a price of OMR 13.50 per unit. If Muscat accepts the supplier's offer; all variable manufacturing costs will be eliminated, but the OMR 50,000 of fixed manufacturing overhead currently being charged to the Cameras will have to be absorbed by other products. What will be the effect on net income? if the productive capacity released by not making the Cameras could be used to produce income of R.O. 40,000

a. OMR 725,000 increase

b. OMR 15,000 increase

c. OMR 15,000 decrease

d. OMR 25,000 decrease

e. None of the answers are correct

Reference no: EM132938750

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