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Charleston Inc. manufactures 40,000 components per year. The manufacturing cost of the components total $190,000 and...

Charleston Inc. manufactures 40,000 components per year. The manufacturing cost of the components total $190,000 and are comprised of direct materials, $90,000 direct labor, $50,000 variable manufacturing overhead, $20,000 and fixed manufacturing overhead $30,000. If Charleston purchases the component from an outside supplier for $4.25 per unit, how will the company's operating profit be impacted? Please show step by step solution. a. none of these b. $10,000 decerase c. $30,000 increase d. $10,000 increase e. $30,000 decrease

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Answer #1

d. $10,000 increase

The relevant cost of manufacturing the 40,000 components equals:

= Direct materials + Direct labor + Variable overhead

= $90,000 + $50,000 + $20,000

= $160,000

The Fixed manufacturing overhead cost is not relevant to this decision since it cannot be avoided.

The cost of purchasing the 40,000 components equals:

= 40,000 units × $4.25

= $170,000

If the components are purchased from the outside supplier, operating profit will decrease by :

= Relevant manufacturing – Cost of purchasing

= $160,000 - $170,000

= -$10,000

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