Compton Products Inc McClintock Inc

Compton Products Inc.
Compton Products Inc. manufactures humidifiers. The company currently makes all of the electronic components for the humidifier itself. When 10 000 units are manufactured each year, the motor costs per unit are as follows:
$\begin{array}{lr}\text { Direct materials } & \$ 6 \\\text { Direct labour } & 8 \\\text { Variable overhead } & 7 \\\text { Fixed overhead } & 9\end{array}$

McClintock Inc. has offered to sell Compton 10 000 motors for $25 per unit. If Compton accepts the offer, 75% of the fixed overhead currently allocated to the motors could be avoided.
-If Compton accepts the offer to purchase 10 000 motors from McClintock,net income will:

A) increase by $27 500.
B) decrease by $17 500.
C) increase by $50 000.
D) decrease by $40 000.

Correct Answer:

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