Mills SA Manufactures 50,000 Components Per Year An Outside Supplier Has Offered to Sell the Component to Per

Essay

Mills SA. manufactures 50,000 components per year. The manufacturing cost per unit of the components is as follows:
$\begin{array}{lr}\text { Direct materials } & £ 12 \\\text { Direct labour } & 13 \\\text { Variable overhead } & 5 \\\text { Fixed overhead } & -10 \\\quad \text { Total unit cost } & £ 40\end{array}$
An outside supplier has offered to sell the component to Mills SA. for £35.

Required:
a.What is the effect on income if Mills SA. purchases the component from the outside supplier?
b.Assume that Mills SA. can avoid £700,000 of the total fixed overhead costs if it purchases the components. Now what is the effect on income if Mills SA. purchases the component from the outside supplier?