Yankton Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials $140,000 Direct labor 230,000 Variable manufacturing overhead 80,000 Fixed manufacturing overhead 120,000 Total $570,000 An outside supplier has offered to sell the component for $23.50. Yankton 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 Yankton purchases the component from the outside supplier

$25,000 increase

Explanation:

Base on the scenario been described in the question, we can use the following method to compute the answer

CALCULATIONS: we can compare total “buy” cost to total “make” cost

So total buy cost is

Buy cost = 6,000 + 3,000 + 16,000 + 40,000 + 510,000= 575,000

And total make cost is

Make cost = 600,000

So the difference between total buy and total cost is

=$600,000 - $575,000

= $25,000

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