At Outsourcing Corporation they are presently making part ABC88354 that is used in one of its...

Question:

At Outsourcing Corporation they are presently making part ABC88354 that is used in one of its products. A total of 9,600 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 Direct materials $5.80 Direct labor $3.20 Variable manufacturing overhead $4.50 Supervisor's salary $2.60 Depreciation of special equipment $6.90 Allocated general overhead $3.20 An outside supplier has offered to make and sell the part to the company for $18.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part ABC88354 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

A) Net operating income would increase by $78,720 per year.

B) Net operating income would decline by $78,720 per year.

C) Net operating income would increase by $18,240 per year.

D) Net operating income would decline by $18,240 per year.

Net Operating Income

The cash generation capability of a company can be determined by the Net operating income of the company. It can be determined by decreasing operating expenses from the company's operating income. Net operating income is the amount before including any cost of taxes.

Answer and Explanation:

The correct option is: C

Calculation of Total cost per unit

Details Amount
Direct Material
Direct Labor
Manufacturing Overhead
Variable Overhead (A)
Supervisor Salary (B)
Total Cost
$ 5.80
$ 3.20
$ 4.50
$ 13.50
$ 2.60
$ 16.10

Calculation of showing operating profit/Loss of the year

We have,

Units 9,600

Total Cost is $ 16.10

Details Amount
Selling Price (9,600*$ 18)
Less: Total Cost (9600*$ 16.10)
$ 172,800
$ 154,560
Net operating income $ 18,240

Learn more about this topic:

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Operations of an Income Statement

from Accounting 101: Financial Accounting

Chapter 8 / Lesson 5
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