Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision.If Rogers Company purchases the components rather than making them internally,what would be the impact on the company's annual net operating income?
A) $237,600 decrease.
B) $81,000 decrease.
C) $94,500 increase.
D) $124,000 increase.

Question

Quizplus · Accepted Answer

If Rogers Company purchases the components rather than making them internally, the company would save on variable manufacturing costs (direct materials, direct labor, and variable overhead) amounting to $237,600 ($7.80 x 30,500 units). However, the company would incur additional fixed costs in the form of purchase price of $610,000. Therefore, the company's annual net operating income would decrease by $81,000 ($237,600 - $610,000).

Assume That There Is No Other Use for the Capacity