Bruce Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows.
DL $320,000
VMOH $120,000
FMOH $160,000
An outside supplier has offered to sell the component for $3.40. If Bruce purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000.
a. If Bruce purchases the component from the supplier instead of manufacturing it, the effect on income would be what?
b. What is the maximum price Bruce would be willing to pay the outside supplier?