Ortega Industries Manufactures 15,000 Components Per Year -
Assume Ortega Industries Could Avoid $40,000 of Fixed Manufacturing

Multiple Choice

Ortega Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 150,000 \\\text { Direct labor } & 240,000 \\\text { Variable maruffacturing overhead } & 90,000 \\\text { Fixed marnufacturing overhead } &\underline{ 120,000 }\\\text { Total } &\underline{ \$ 600,000 }\\\end{array}$$
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Assume Ortega Industries could avoid $40,000 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:

A) $60,000 increase.
B) $10,000 increase.
C) $100,000 decrease.
D) $140,000 increase.