Posted: May 4th, 2016

What is the effect on income if Foster purchases the component from the outside supplier?

Total $600,000

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier has offered to sell the component for $25.50.

What is the effect on income if Foster Industries purchases the component from the outside supplier?
a. $25,000 increase
b. $45,000 increase
c. $90,000 decrease
d. $90,000 increase

10. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials $150,000
Direct labor 240,000
Variable manufacturing overhead 90,000
Fixed manufacturing overhead 120,000
Total $600,000

An outside supplier has offered to sell the component for $25.50.

Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.

What is the effect on income if Foster purchases the component from the outside supplier?
a. $45,000 increase
b. $15,000 increase
c. $75,000 decrease
d. $105,000 increase

11. Jamie Corporation had the following information:

Revenues $250,000
Cost of goods sold:
Direct materials $50,000
Direct labor 37,500
Overhead 62,500 150,000
Gross profit $100,000
Selling and administrative expenses 37,500
Operating income $ 62,500