Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows.

Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows.

DM                 $300,000
DL                  $480,000
VMOH             $180,000
FMOH             $240,000
Total          $1,200,000

a. Assume that the fixed manufacturing overhead reflects the cost of Tofte's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Tofte for $34. If Tofte Industries purchases the component from the outside supplier, the effect on income would be what?
b. Assume Tofte Industries could avoid $80,000 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 Tofte purchases the component from the supplier instead of manufacturing it, the effect on income would be what?

Answer