Andrews Industries manufactures 10,000 components per year.The manufacturing cost of the components was determined as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 140,000 \
\text { Direct labour } & 230,000 \
\text { Inspecting products } & 50,000 \
\text { Providing power } & 20,000 \
\text { Providing supervision } & 30,000 \
\text { Setting up equipment } & 50,000 \
\text { Moving materials } & 10,000 \
\text { Total } & \$ 530,000
\end{array}$$ If the component is not produced by Andrews,inspection of products and provision of power costs will be only 10% of the production costs,moving materials costs and setting up equipment costs will be only 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 $45. Suppose Andrews Industries purchases the component from the outside supplier.What will be the effect on Andrew's income?
A) a $31,000 increase
B) a $31,000 decrease
C) a $91,000 increase
D) a $91,000 decrease

Question

Andrews Industries manufactures 10,000 components per year.The manufacturing cost of the components was determined as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 140,000 \
\text { Direct labour } & 230,000 \
\text { Inspecting products } & 50,000 \
\text { Providing power } & 20,000 \
\text { Providing supervision } & 30,000 \
\text { Setting up equipment } & 50,000 \
\text { Moving materials } & 10,000 \
\text { Total } & \$ 530,000
\end{array}$$ If the component is not produced by Andrews,inspection of products and provision of power costs will be only 10% of the production costs,moving materials costs and setting up equipment costs will be only 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 $45. Suppose Andrews Industries purchases the component from the outside supplier.What will be the effect on Andrew's income?
A) a $31,000 increase
B) a $31,000 decrease
C) a $91,000 increase
D) a $91,000 decrease

Quizplus · Accepted Answer

If Andrews purchases the components, they save on variable costs but incur the purchase cost. The savings are $140,000 (materials) + $230,000 (labor) + $45,000 (90% of inspection and power) + $30,000 (50% of setup and moving) + $18,000 (60% of supervision) = $463,000. The purchase cost is $450,000 (10,000 components x $45). The net effect is a $31,000 increase in income ($463,000 - $450,000).

Andrews Industries Manufactures 10,000 Components Per Year If the Component Is Not Produced by Andrews,inspection of Products