Ortega Industries manufactures 21,300 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials $ 186,000 Direct labor 420,000 Variable manufacturing overhead 108,000 Fixed manufacturing overhead 300,000 Total $ 1,014,000 Assume Ortega Industries could avoid $130,000 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 Ortega purchases the component from the supplier instead of manufacturing it, the effect on income would be a:

Decrease by $10,200

Explanation:

The effect on income is shown below:-

                                    If produce from                     If component purchased

                                    Ortega Industries                           from outside

Number of Components

produced                       21,300                                          21,300

Total cost incurred       $1,014,000                                  $1,024,200

                                                                           (21,300 × $34) + $300,000

Difference =  $1,014,000 - $1,024,200

= -$10,200

The consequence would be if Ortega Industries buy the product from outside suppliers that will decrease the impact on income by $10,200

Since there will be fixed overhead of Ortega whether it's generated or not. So when they are purchased from outsiders, we need to consider those amounts as part cost.

answer: technology

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