Foster Industries Manufactures 20,000 Components Per Year

Multiple Choice

Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount. An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?

A) $25,000 increase
B) $45,000 increase
C) $90,000 decrease
D) $90,000 increase