Question

Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follws Direct materials Direct labor Inspecting products Providing power 240,000 60,000 30,000 40,000 60,000 Setting up equipment Moving materials 600,000 production costs; moving materials costs and setting up equipment costs will only be S0% of the production costs: and supervison costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for osso. What is the effect on income if Foster Industries purchases the component from the outside supplier? a. $45,000 increase Ob. $25,000 increase c. $90,000 decrease d. $90,000 increase Next Previous

Answer 1

Solution for-1

b. $25000 increase is correct answer

Cost of Manufacturing	Amount
Direct Materials	$1,50,000.00
Direct Labour	$2,40,000.00
Inspecting products   60,000*0.90	$54,000.00
Providing Power   30,000 *0.90	$27,000.00
Providing Supervision 40000*0.60	$24,000.00
Settleing up Equipment   60000*0.50	$30,000.00
Moving Materilas   20,000*0.50	$10,000.00
Total	$5,35,000.00
Buying Cost   (20000*25.50)	$5,10,000.00
Incremental Saving by Purchase ( $535000-$510000)	$25,000.00