Gordon Company produces 1,000 units of a part per year which are used in the assembly of one of its products. The unit cost of producing these parts is

Variable Manufacturing cost $15

Fixed Manufacturing Cost 12

Total manufacturing cost 27

The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the total fixed costs incurred in producing the part can be eliminated. The annual increase or decrease on the company's operating incomes as a result of buying the part from the outside supplier would be:

a: 3000 increase

b: 1,000 decrease

c: 7,000 increase

d: 5,000 decrease

Question 2.

Sharp Company produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows:

Variable manufacturing cost: 16

Fixed Manufacturing cost: 20

Unit product cost 36

The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. If the parts are purchased from the outside supplier, the annual impact on the company's operating income will be:

A 24,000 increase

b 24,000 decrease

c 56,000 decrease

d 56,000 increase