Western Industries Manufactures 40,000 Components Per Year An Outside Supplier Has Offered to Sell the Component for the Components

question 147

Multiple Choice

Western Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: $$\begin{array} { l r } \text { Direct materials } & \$ 75,000 \\\text { Direct labour } & 120,000 \\\text { Variable manufacturing overhead } & 45,000 \\\text { Fixed manufacturing overhead } & 60,000 \\\text { Total } & \$ 300,000\end{array}$$ An outside supplier has offered to sell the component for $12.75. Western Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Western purchases the component from the outside supplier?

• A) a $135,000 increase
• B) a $165,000 decrease
• C) a $195,000 increase
• D) a $225,000 decrease