Solomon Company Manufactures 20,000 Components Per Year Assume That the Fixed Overhead Reflects the Cost of Solomon's

question 13

Essay

Solomon Company manufactures 20,000 components per year. The manufacturing cost per unit of the components is as follows: $\begin{array}{lr}\text { Direct materials } & £ 10 \\\text { Direct labour } & 14 \\\text { Variable overhead } & 6 \\\text { Fixed overhead } & 83 \\\text { Total unit cost } & £ 38\end{array}$
Assume that the fixed overhead reflects the cost of Solomon's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Solomon for £32.

Required:
a.What is the effect on income if Solomon purchases the component from the outside supplier?
b.Assume that Solomon can avoid £50,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Solomon purchases the component from the outside supplier?

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Definitions:

Economic Inequality

The unequal distribution of wealth, income, or resources within a society, often leading to social and economic disparities.

Dorr War

A short-lived armed insurrection in Rhode Island in the 1840s, advocating for broader voting rights and reform of the state’s electoral system.

Voting Laws

Regulations and statutes that determine who is eligible to vote, how and when voting occurs, and what mechanisms are used to cast and count votes.

Rhode Island

The smallest U.S. state by area, located in the New England region, known for its sandy shores and maritime history.