Foster Industries Manufactures 20,000 Components Per Year If the Component Is Not Produced by Foster,inspection of Products

question 30

Multiple Choice

Foster Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows: $\begin{array}{lr}\text { Direct materials } & \$ 150,000 \\\text { Direct labour } & 240,000 \\\text { Inspecting products } & 60,000 \\\text { Providing power } & 30,000 \\\text { Providing supervision } & 40,000 \\\text { Setting up equipment } & 60,000 \\\text { Moving materials } & 20,000 \\\text { Total } & \$ 600,000\end{array}$
If the component is not produced by Foster,inspection of products and provision of power costs will be only 10 percent of the production costs; moving materials costs and setting up equipment costs will be only 50 percent of the production costs; and supervision costs will amount to only 40 percent of the production amount.An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?

• A)$25,000 increase
• B)$45,000 increase
• C)$90,000 decrease
• D)$90,000 increase

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