Question

12. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components is as follows: $ 75,000 $120,000 45,000 $ 60,000 $300,000 Direct materials Direct labor Variable overhead Fixed overhead Total An outside supplier has offered to sell the component to Vest Industries for $12.75 per unit. If the component is purchased from an outside supplier, then the facilities previously used to manufacture the component can be used to produce an alternative product with a contribution margin ratio of 30%. Sales revenue from the new product will be $150,000. Vest currently has the capacity to produce the alternative product. Therefore, no additional fixed costs will be incurred if Vest produces the alternative prod of whether Vest produces the component or the alternative product). What is the effect on Vest's operating income of purchasing the component from the outside supplier? (i.e., fixed costs will remain the same rdless a) $195,000 increase b) $135,000 increase c) $165,000 decrease d) $225,000 decrease e) None of the above

Answer 1

	Total 40000 units
	Make	Buy
Direct materials	75000
Direct labor	120000
Variable overhead	45000
Opportunity cost	45000		=150000*30%
Purchase cost		510000	=40000*12.75
Total	285000	510000
Difference in favor of making = 285000-510000 = $225000
Option D $225,000 decrease is correct