59. ABC Company produces 1,000 parts per year for use in its own finished goods.

Question

59. ABC Company produces 1,000 parts per year for use in its own finished goods. The variable product cost of these parts is $15 per unit. The fixed manufacturing overhead of the product is $12,000. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The part can be purchased from an outside supplier at $20 per unit. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be: A. $3,000 decrease B. $1,000 increase C. $5,000 increase D. $3,000 increase

Explanation / Answer

Answer D. 3000 increase is correct, just see how it happens

Savings in Fixed manufacturing cost = 120000x2/3

   = 8000

Less: Excess variable cost    = (20-15) x 1000

   = 5000

Net savings    = 3000

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