Aircraft Products, a manufacturer of aircraft landing gear, makes 1,400 units ea
ID: 2438314 • Letter: A
Question
Aircraft Products, a manufacturer of aircraft landing gear, makes 1,400 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $74 and fixed costs of $65. The valves could be purchased from an outside supplier at $81 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:
Increase by $44,800.
Increase by $26,600.
Decrease by $26,600.
Decrease by $44,800.
Aircraft Products, a manufacturer of aircraft landing gear, makes 1,400 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $74 and fixed costs of $65. The valves could be purchased from an outside supplier at $81 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:
Explanation / Answer
Correct Answer ---Increase by $26600.00
Calculation of Total Cost
Alternative 1-Making Valve
Variable cost
(74*1400)
$ 103,600.00
Total Manufacturing Cost
$ 103,600.00
Calculation of Total Cost
Alternative 2- Buying Value from Outside
Purchase Price
(81*1400)
$ 113,400.00
Less: Benefit Achieved on buying from outside (saving in Fixed cost)
(65*1400)*40%
$ 36,400.00
Total Cost of Buying
$ 77,000.00
Calculation of Increase in Income
Total Manufacturing Cost
$ 103,600.00
Total Cost of Buying
$ 77,000.00
Additional Benefit/ Increase in Income
$ 26,600.00
Buying the valves from the outside supplier instead of making them would cause the company's operating income to:
Increase by $26600
Calculation of Total Cost
Alternative 1-Making Valve
Variable cost
(74*1400)
$ 103,600.00
Total Manufacturing Cost
$ 103,600.00
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