Scarlet Company Produces Electronic Components for Electronic Systems Ocher Company Has Offered a One-Year Contract to Supply the Sells

question 79

Multiple Choice

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: $$\begin{array} { l r l r } \text { Variable costs per unit: } & { \text { Fixed costs per month: } } \\\text { Direct materials } & \$ 4.50 & \text { Factory overhead } & \$ 60,000 \\\text { Directlabor } & 2.25 & \text { Selling and admin. } & 30,000 \\\text { Factory overhead } & \underline { 2.25 } & \text { Total } & \$ 90,000 \\\text { Total } & \$ 9.00 & &\end{array}$$
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