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Knaack Corporation is presently making part R20 that is used in one of its products A total of 18,000 units of this part are produced
Knaack Corporation is presently making part R20 that is used in one of its products A total of 18,000 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 Per Unit $8.00 Direct materials Direct labor Variable overhead Supervisor's salary... Depreciation of special equipment.... Allocated gencral overhead $3.60 $7.10 $7.30 $8.20 An outside supplier hes offered to produce and sell the part to the company for $2770 each it thls offer is accepted, the supervisors salary and all of the variable costs, including direct labor can be avoided. The special equipment used to make the pert was purchased many years ago and has no salvege value or other use. The allocated general overheed represents fixed costs of the entire company none of which would be avoided if the part were purchased instead of produced internaly If manegement decides to buy part R20 from the outside supplier rether than to continue making the part whet would be the annual impact on the company's overell net opereting income O Net opereting income would increase by $162,000 per year O Net operating income would decline by $162.000 per year O Net operating income would incresse by $50.400 per year O Net operating income would decline by $50.400 per year
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