Question
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Save & Exit Submi Time remalning: 1:50.20 18. Part S00 is used in one of Morsey Corporation's products. The company makes 6,000 units of this pait the part at this level of activity ear. The companys Accounting Department reports the following costs of produci Direct materials Direct labor Variable manufacturing overhead Supervisors salary Depreclation of special equipment Allocated general overhead Per Unit $1.40 $2.40 $7.20 S3.60 $8.90 $4.50 An outside supplier has offered to produce this part and sell it to the company for $1610 each If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, c 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. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided If management decides to buy part SO0 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 O Net operating income would decrease by $65.400 per year O Net operating income would decrease by $77.400 per year O Net operating income would decrease by $3,000 per year O Net operating income would decrease by $71.400 per year
Explanation / Answer
Computation of Net operating Income Direct Material $1.40 Direct Labour $2.40 Variable Manufacturing Overhead $7.20 Supervisor's Salary $3.60 Total avoidable Variable Cost $14.60 Price offer by Supplier $16.10 Incremental Variable Cost /Unit by accepting Offer $1.50 No. of Unit 6000 Unit Total incremental variable cost in accepting Proposal (a) 9000 Avoidable General Overhead will save (b) 6000 Net Incom will be decreased by (a-b) 3000
