Jenkins Incorporated is presently making part P37 that is used in one of its products. A total of 10,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for $23.90 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these allocated general overhead costs would be avoided. In addition to the facts given above, assume that the space used to produce part P37 could be used to make more of one of the company's other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company's overall net operating income of buying part P37 from the outside supplier and using the freed space to make more of the other product?

Select one:

a. Net operating income would increase by $13,000 per year.

b. Net operating income would increase by $8,000 per year.

c. Net operating income would decline by $42,000 per year.

d. Net operating income would decline by $68,000 per year.

Per Unit $4.20 Direct materials $4.40 Direct labor Variable overhead $7.70 $6.70 Supervisor's salary $3.10 Depreciation of special equipment $3.30 Allocated general overhead