Damon Industries Manufactures 20,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for of the Components

question 50

Multiple Choice

Damon Industries manufactures 20,000 components per year. The manufacturing costs of the components was determined as follows:
$\begin{array}{lr}\text { Direct materials } & \$ 100,000 \\\text { Direct labor } & 160,000 \\\text { Variable manufacturing overhead } & 60,000 \\\text { Fixed manufacturing overhead } & 80,000\end{array}$
An outside supplier has offered to sell the component for $17. If Damon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Damon purchases the component from the supplier instead of manufacturing it, the effect on operating profits would be a:

• A) $70,000 increase.
• B) $50,000 decrease.
• C) $10,000 decrease.
• D) $30,000 increase.

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Definitions:

Consumer Demand

The desire and willingness of consumers to purchase goods and services at given prices.

Increasing-Cost Industry

An industry in which production costs increase as output expands, often due to limited resources or rising input costs.

Decline In Demand

A situation where consumers' desire and ability to purchase a product or service decreases, often reflected in lower sales volumes.

Industry Exit

The process of a business ceasing operations in a particular industry, often due to economic factors, competitive pressures, or changes in market demand.