Posted: August 24th, 2016

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

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

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