Question

 Mills Inc. manufacturers 50,000 components per year. The manufacturing cost per unit of the components is as follows:

Direct materials $ 12
Direct labor 13
Variable overhead 5
Fixed overhead 10
Total unit cost $40

An outside supplier has offered to sell the component to Mills Inc. for $35

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