Vest Industries Manufactures 40,000 Components Per Year

question 112

Multiple Choice

Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $12.75.Fixed cost will remain the same if the component is purchased from an outside supplier.
Vest 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 Vest purchases the component from the outside supplier?

• A)$225,000 decrease
• B)$195,000 increase
• C)$165,000 decrease
• D)$135,000 increase

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Definitions:

Relevant Information

Relevant information comprises data that is applicable and helpful in making decisions, particularly in the context of financial and managerial accounting.

Qualitative Characteristic

Attributes that make the information provided in financial statements useful to users, including relevance, understandability, comparability, and reliability.

Cost Constraint

The principle that the cost of providing financial information should not outweigh the benefits that the information provides to users.