Ecru Company Manufactures 10,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for of the Components

question 33

Multiple Choice

Ecru Company manufactures 10,000 components per year. The manufacturing cost of the components was determined as follows: $$\begin{array} { l r } \text { Direct materials } & \$ 70,000 \\\text { Direct labor } & 115,000 \\\text { Variable manufacturing overhead } & 40,000 \\\text { Fixed manufacturing overhead } & 60,000 \\\text { Total } & \$ 285,000\end{array}$$ An outside supplier has offered to sell the component for $20.
What is the effect on income if Ecru Company purchases the component from the outside supplier?

• A)A $25,000 increase
• B)A $25,000 decrease
• C)A $85,000 decrease
• D)A $85,000 increase

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Definitions:

Tax Benefit

Financial savings in tax that are realized through various deductions, credits, or exclusions from gross income.

Revoked

Officially canceled, withdrawn, or annulled, often referring to licenses, permissions, or legal rights.

Unilateral Contract

A contract in which one party makes a promise in exchange for the other party's performance, becoming binding only upon the latter's action.

Gratuitous Promise

A one-sided agreement that the courts will not enforce.