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:

Automobile Finance Company

A financial institution that provides loans to individuals or businesses specifically for the purpose of purchasing automobiles.

Market Signals

Indicators or signs that guide economic actors to make decisions based on current market conditions.

Moral Hazard

A situation where one party is more likely to take risks because they do not bear the full consequences of those risks.

Warranties

Guarantees issued by a manufacturer or seller to a buyer, promising to repair or replace a product if it fails within a certain period of time.