Alonzo Enterprises manufactures one of the components used to assemble its prima

Question

Alonzo Enterprises manufactures one of the components used to assemble its primary product. Specialty Parts has offered to sell the component to Alonzo at a price of $12.80 per unit. Alonzo currently produces 100,000 units of the component. The unit manufacturing cost is computed as follows DM per unit DL per unit Variable MOH per unit Fixed MOH per unit $5.00 6.00 1.75 2.00 ii 1 Manufacturing cost per unitS14.75 None of Alonzo's fixed costs will be eliminated if production of the component is outsourced. However, the freed up capacity could be used to build a different product, which is expected to generate $4,000 of contribution margin per year. Assume Alonzo still needs 100,000 units next year What will happen to the company's operating income if production of the component is outsourced? OA. The company's operating income will increase O B. The company's opeating income will decrease If production of the component is outsourced, what the expected change in Alonzo's operating income? (enter an absolute dollar amount) ange in Operating Income $

Explanation / Answer

Relevant cost to buy=100000*12.80=$1280000 Relevant cost to make=100000*(5+6+1.75)+4000= $1279000 1 The company's operating income will decrease 2 Change in operating income $1000(1280000-1279000)

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