W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for 1,000 units are as follows:

It is estimated that 6% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $94.75 per unit.
If W.T. Ginsburg Engine Company purchases 1,000 ACT31107 parts from the outside supplier per month, then its monthly operating income will ________. (Round any intermediary calculations and your final answer to the nearest cent.)
A) increase by $8,670
B) increase by $21,330
C) decrease by $8,670
D) decrease by $21,330

Question

W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for 1,000 units are as follows:

It is estimated that 6% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $94.75 per unit.
If W.T. Ginsburg Engine Company purchases 1,000 ACT31107 parts from the outside supplier per month, then its monthly operating income will ________. (Round any intermediary calculations and your final answer to the nearest cent.)
A) increase by $8,670 
B) increase by $21,330 
C) decrease by $8,670 
D) decrease by $21,330

Quizplus · Accepted Answer

Total avoidable costs = $42,000 + $10,500 + $32,500 + ($18,000 x 6%) = $86,080
Change in monthly operating income = Avoidable costs $86,080 - ($94.75 × 1,000 units) = decrease of $8,670

WT Ginsburg Engine Company Manufactures Part ACT31107 Used in Several