Question

Getz Industries manufactures 11924 components per year. The manufacturing costs per component was determined as follows:

Direct materials

$205398

Direct labour

337066

Variable manufacturing overhead

136501

Fixed manufacturing overhead

336910

An outside supplier has offered to sell Getz the component for $78.

Assume Getz Industries could rent their unused manufacturing facilities for $64745 if they purchase the component from the outside supplier. If Getz purchases the component from the supplier instead of manufacturing it, the effect on income would be:

Answer 1

Decision making ;

	Make	Buy
Direct material	205398
Direct labour	337066
Variable manufacturing overhead	136501
Purchase cost (11924*78)		930072
Opportunity cost	64745
Total	743710	930072

If Getz purchases the component from the supplier instead of manufacturing it, the effect on income would be:

Decrease operating income by (930072-743710) = (186362)