Mills Inc. manufactures 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 $300,000 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?