Reference no: EM132596165

Question 1: Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials $140,000

Direct labor 230,000

Variable overhead 80,000

Fixed overhead 120,000

Total $570,000

An outside supplier has offered to sell the component for $23.50. Yankton 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 Yankton purchases the component from the outside supplier?

a. $25,000 increase b. $45,000 increase c. $75,000 decrease d. $105,000 increase

Question 2: Scarlet Company produces electronic components for electronic systems. The company sells 10,000 components per year for $15. The capacity is 12,500 units per year.

Manufacturing and other costs are as follows:

Variable costs per unit:             Fixed costs per month:

Direct materials $4.50               Factory overhead $60,000

Direct labor 2.25                     Selling and admin. 30,000

Factory overhead 2.25                   Total $90,000

Total $9.00

Ocher Company has offered a one-year contract to supply the components at a cost of $8.50 per unit. If Scarlet Company accepts the offer, it will be able to rent unused space to an outside firm for $9,000 per year. All other information remains the same. What is the effect on profits if Scarlet Company buys the components from Ocher Company?

a. A decrease of $14,000

b. An increase of $14,000

c. An increase of $104,000

d. A decrease of $44,000