Ortega Industries Manufactures 15,000 Components Per Year Assume Ortega Industries Could Avoid $40,000 of Fixed Manufacturing Overhead

question 79

Multiple Choice

Ortega Industries manufactures 15,000 components per year.The manufacturing cost of the components was determined to be as follows:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 150,000 \\\hline \text { Direct labor } & 240,000 \\\hline \text { Variable manufacturing overhead } & 90,000 \\\hline \text { Fixed manufacturing overhead } & 120,000 \\\hline \text { Total } & \$ 600,000 \\\hline\end{array}$$
Assume Ortega Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier.An outside supplier has offered to sell the component for $34.If Ortega purchases the component from the supplier instead of manufacturing it,the effect on income would be a:

• A) $60,000 increase.
• B) $10,000 increase.
• C) $100,000 decrease.
• D) $140,000 increase.

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