Frank Industries Manufactures 200,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for of the Components

question 101

Essay

Frank Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 200,000 \\\text { Direct labor } & 320,000 \\\text { Variable manufacturing overhead } & 120,000 \\\text { Fixed manfacturing overhead } & 160,000\end{array}$$
An outside supplier has offered to sell the component for $3.40 each. If Frank purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000.
Required:
a. If Frank purchases the component from the supplier instead of manufacturing it, the effect on income would be:
b. What is the maximum price Frank would be willing to pay the outside supplier?

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