Ortega Industries manufactures 15,000 components per year.The manufacturing cost of the components was determined to be as follows:
$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 150,000 \\\hline \text { Direct labor } & 240,000 \\\hline \text { Variable manufacturing overhead } & 90,000 \\\hline \text { Fixed manufacturing overhead } & 120,000 \\\hline \text { Total } & \$ 600,000 \\\hline\end{array}$
Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility.This facility cannot be used for any other purpose.An outside supplier has offered to sell the component to Ortega for $34.If Ortega Industries purchases the component from the outside supplier,the effect on income would be a:

Question

Ortega Industries manufactures 15,000 components per year.The manufacturing cost of the components was determined to be as follows:

\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 150,000 \\\hline \text { Direct labor } & 240,000 \\\hline \text { Variable manufacturing overhead } & 90,000 \\\hline \text { Fixed manufacturing overhead } & 120,000 \\\hline \text { Total } & \$ 600,000 \\\hline\end{array}

Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility.This facility cannot be used for any other purpose.An outside supplier has offered to sell the component to Ortega for $34.If Ortega Industries purchases the component from the outside supplier,the effect on income would be a:

Quizplus · Accepted Answer

If Ortega purchases the components from the outside supplier, it will save the variable manufacturing costs of $90,000 and the direct labor costs of $240,000, for a total savings of $330,000. However, it will also incur the cost of purchasing the components from the outside supplier, which is $34 per component, or $510,000 (15,000 components * $34 per component). Therefore, the net effect on income would be a decrease of $30,000 ($510,000 - $330,000).

Ortega Industries Manufactures 15,000 Components Per Year Assume That the Fixed Manufacturing Overhead Reflects the Cost of the Components