SECTION B: MANAGEMENT ACCOUNTING [50 MARKS]

QUESTION 1 (10 marks)

Babalwa Industries manufactures 20 000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials	R150 000
Direct labour	240 000
Inspecting products	60 000
Providing power	30 000
Providing supervision	40 000
Setting up equipment	60 000
Moving materials	20000
Total manufacturing cost	R600 000

If the component is not produced by Babalwa, 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 R25.50. What is the effect on income if Babalwa Industries purchases the component from the outside supplier?