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Concierge Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total $ 75,000 120,000 45,000 60,000 300,000 An outside supplier has offered to sell the component for $12.75 Concierge 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 Concierge purchases the component from the outside supplier? Oa. $135,000 increase b. $165,000 decrease O c. $ 195,000 increase Od. $225,000 decrease

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Answer:

b. $165,000 decrease

Explanation:

The total cost per year if Concierge Industries purchase the component outside is $510,000 (= $12.75 x 40,000 components per year)

But Concierge Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier  

So the income/ loss if Concierge purchases the component from the outside supplier  

=  saving of manufacturing cost $300,000 + rental of $45,000 - $510,000 cost paid to outside supplier  

= ($165,000)

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