Ask Question
2 November, 20:49

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Direct materials $ 150,000 Direct labor 240,000 Variable manufacturing overhead 90,000 Fixed manufacturing overhead 120,000 Total $ 600,000 Assume that the fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Ortega for $34. If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a:A. $30,000 decrease

B. $30,000 increase

C. $90,000 decrease

D. $90,000 increase

+2
Answers (1)
  1. 2 November, 21:18
    0
    A. $30,000 decrease

    Explanation:

    Ortega Industries

    Direct materials $ 150,000

    Direct labor 240,000

    Variable manufacturing overhead 90,000

    Fixed manufacturing overhead 120,000

    Total Manufacturing Costs for 15000 units is $ 600,000

    Total Manufacturing Costs per unit = Total Costs / Total units = $600,000 / 15000 = $ 40

    An outside supplier has offered to sell the component to Ortega for $34.

    Profit per unit = $ 6

    Profit for 15000 units = $6*15000 = $ 90,000

    The fixed manufacturing overhead reflects the cost of Ortega's manufacturing facility = $ 120,000 Which cannot be used for any other facility.

    Unavoidable Fixed Costs = $ 120,000

    Less Profits = $ 90,000

    Decrease in operating Profits $ 30,000

    If Ortega Industries purchases the component from the outside supplier, the effect on operating profits would be a $30,000 decrease because after the profit of $ 90,000 cancel the effect of fixed costs of $ 90,000 the fixed costs of $ 30,000 will still be unavoidable and cannot be used for any other facility.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Direct ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers