production of Part P40 Part P40 is a part used in the production of air conditio

Question

production of Part P40 Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data rolate to the Number of parts produced annually24,000 Fixed costs Variablo costs Total cost to produce $43.000 $71.000 $114,000 ey purch ase from the outside supplier 50% of the fixed costs would be ation ean purchase the part t oman outs 1 su peller for S4 42 per untir avoided If Jackson Corporation makes the part, how much williRs operating income be? OA. $21,500 greater than if the company bought the part OB. $127,580 greater than if the company bought the part , S56580 greater than the company bought the part O D. $13,580 greater than if the company bought the part

Explanation / Answer

d.$13,580 greater than the company bought the part.

annual fixed costs, only those are relevant which are avoidable

=> $43,000 * 50% =>$21,500 are relevant.

the below table shows the comparision:

since the total cost under making option is less than purchase option by (106,080 - 92,500) =>$13,580.

It can be said that the operating income if making is adopted would be $13,580 more than the net income under purchase option.

make purchase purchase cost ($4.42*24,000) nil $106,080 variable costs $71,000 nil fixed costs (only 50% which are avoidable are relevant) $21,500 total cost $92,500 $106,080

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