Eric, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to produce...
Eric, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to produce the subcomponents are:
The unit costs to produce are:
Per unit
Direct materials $60
Direct labor $100
Variable manufacturing applied $75
Fixed manufacturing overhead $90
Total unit cost $325
Due to a labor strike, Eric is considering purchasing the subcomponents from an outside supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded by the union. If Eric purchases the subcomponent from the outside supplier, how much will profit differ from what it would be if it manufactured the subcomponents with the increase in direct labor cost?
a. $30,000 less
b. $20,000 less
c. $10,000 less
d. $20,000 more
Homework Answers
Increase (decrease) in profit
= Variable Manufacturing costs - supplier cost
= [(60+110+75)*2,000] - (2000*250)
= 490,000 - 500,000
= (10,000)
Option C is the answer
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