Valuable Electronics uses a standard part in the manufacture of different types

Question

Valuable Electronics uses a standard part in the manufacture of different types of radios. The total cost of producing 29,000 parts is $105,000, which includes fixed costs of $50,000 and variable costs of $55,000. The company can buy the part from an outside supplier for $2 per unit and avoid 30% of the fixed costs. Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000. If Valuable outsources, what will be the effect on operating income? A. increase of $28,000 decrease of $28,000 c. ecrease of $15,000 D. increase of $16,000

Explanation / Answer

Produce Inside Produce Outside Variable Cost $55,000 $0 Fixed Cost $50,000 $35,000 (avoid 30%) $58,000 Purchase cost from Outside (29000 Unit X $ 2) Total Cost $1,05,000 $93,000 Less: Increamental profit due to freed the manufacturing space $0 $16,000 Net Cost $1,05,000 $77,000 Increamental Profit = $28,000 ($ 105,000 - $ 77,000) Answer = Option A = Increase of $ 28,000

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