Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials $150,000 Direct labor 240,000 Inspecting products 60,000 Providing power 30,000 Moving materials 20,000 Setting up equipment 60,000 Providing supervision 40,000 Total $600,000 If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for $25.50. What is the effect on income if Foster Industries purchases the component from the outside supplier? Question 6 options: $90,000 increase $90,000 decrease $45,000 increase $25,000 increase

$25,000 increase

Explanation:

Cost of Manufacturing                                                           Amount

Direct Materials                                                                    $150,000.00

Direct Labor                                                                          $240,000.00

Inspecting products                            60,000 x 0.90              $54,000.00

Providing Power                       30,000 x 0.90                      $27,000.00

Providing Supervision           40000 x 0.60                              $24,000.00

Setting up Equipment                    60000 x 0.50              $30,000.00

Moving Materials                           20,000 x 0.50               $10,000.00

Total                                                                                    $535,000.00

Buying Cost                                  (20000 x 25.50)             $510,000.00

Incremental Saving by Purchase ( $535000-$510000)      $25,000.00

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