Question
Your Company uses a total of 18,000 units of a part that are produced and used every year. The company's Accounting Department reports the following
Your Company uses a total of 18,000 units of a part that are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
Direct materials......................................... $4.75 per unit
Direct labor................................................ $2.85 per unit
Variable manufacturing overhead............. $7.95 per unit
Supervisors salary.................................... $9.50 per unit
Depreciation of special equipment............ $2.50 per unit
Other fixed costs........................................ $8.00 per unit
An outside supplier has offered to make the part and sell it to the company for $32 each. If this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. If the part were purchased instead of produced, $5 of the other fixed costs could be avoided. In addition, the space used to make the part could be used to make more of one of the company's other products, generating an additional segment margin of $45,000 per year for that product. What would be the impact on the company's overall net operating income of buying the part?
Increase by $63,900 per year.
Decrease by $53,100 per year.
Increase by $9,900 per year.
Decrease by $35,100 per year.
Decrease by $8,100 per year.
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