Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs:
Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost.
-If Melbourne decides to purchase the subcomponent from the outside supplier,the annual financial advantage (disadvantage)would be:
A) $120,000
B) $20,000
C) ($120,000)
D) ($20,000)

Question

Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs:
  Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost.
-If Melbourne decides to purchase the subcomponent from the outside supplier,the annual financial advantage (disadvantage)would be:
A) $120,000 
B) $20,000 
C) ($120,000) 
D) ($20,000)

Quizplus · Accepted Answer

11ea7761_160d_3abe_81a5_dd4f4aa21368_TB2580_00 Purchasing the part would result in $120,000 higher cost.

Melbourne Corporation Has Traditionally Made a Subcomponent of Its Major