Manor,Inc.currently manufactures 1,000 subcomponents per month in one of its factories.The unit costs to produce the subcomponents are: Manor is considering purchasing the subcomponents from an outside supplier,who normally charges $300 per unit.The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join,but whose members can purchase the subcomponents for $250 per unit.Fixed overhead is not avoidable.If Manor chose to purchase the subcomponents using the cheaper of the two buying options,what would be the effect on profit?
A)Decrease $25,000
B)Decrease $5,000
C)Increase $20,000
D)Increase $75,000

Question

Manor,Inc.currently manufactures 1,000 subcomponents per month in one of its factories.The unit costs to produce the subcomponents are:  Manor is considering purchasing the subcomponents from an outside supplier,who normally charges $300 per unit.The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join,but whose members can purchase the subcomponents for $250 per unit.Fixed overhead is not avoidable.If Manor chose to purchase the subcomponents using the cheaper of the two buying options,what would be the effect on profit?
A)Decrease $25,000 
B)Decrease $5,000 
C)Increase $20,000 
D)Increase $75,000

Quizplus · Accepted Answer

Currently, Manor's total cost to produce 1,000 subcomponents is:

Variable cost = $6,000 (1,000 x $6)
Fixed overhead = $10,000 
Total cost = $16,000

If Manor were to purchase the subcomponents from the outside supplier for $250 per unit, the cost would be $250,000 (1,000 x $250), plus the monthly fee of $30,000 for the Exclusive Buyer's Club, resulting in a total cost of $280,000.

Manor's total cost to produce 1,000 subcomponents would be:

Variable cost = $6,000 (1,000 x $6)
Fixed overhead = $10,000 
Total cost = $16,000

Therefore, the net effect on profit if Manor were to purchase the subcomponents from the outside supplier would be:

Net effect on profit = Current cost - New cost 
Net effect on profit = $16,000 - $280,000 
Net effect on profit = -$264,000

So, purchasing the subcomponents from the outside supplier would decrease Manor's profit by $264,000. However, if Manor were to join the Exclusive Buyer's Club and purchase the subcomponents for $250 each, the total cost would be $280,000 + $30,000 = $310,000.

The new cost to produce 1,000 subcomponents would be:

Variable cost = $2,500 (1,000 x $2.50)
Fixed overhead = $10,000 
Total cost = $12,500

Therefore, the net effect on profit if Manor were to purchase the subcomponents as a member of the Exclusive Buyer's Club would be:

Net effect on profit = Current cost - New cost 
Net effect on profit = $16,000 - $12,500 
Net effect on profit = $3,500

So, purchasing the subcomponents as a member of the Exclusive Buyer's Club would increase Manor's profit by $3,500.

Since the question asks for the effect on profit if Manor were to choose the cheaper of the two buying options, which would be to join the Exclusive Buyer's Club and purchase the subcomponents for $250 each, the answer is B) Decrease $5,000.

Manor,IncCurrently Manufactures 1,000 Subcomponents Per Month in One of Its