The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:

$\begin{array}{|l|r|}
\hline \text { Direct Materials } & \$ 4.20 \
\hline \text { Direct Labour } & \$ 120 \
\hline \text { Variable Manufacturing Overhead } & \$ 5.80 \
\hline \text { Fixed Manufactiong Overhead } & \$ 6.50\
\hline
\end{array}$

Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $ \$ 25 $ per component. Assume that direct labour is a variable cost.
-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 not be affected by this decision.If Rodgers Company were to purchase the components rather than making them internally,what would be the impact on the company's annual operating income?
A) $81,000 decrease.
B) $94,500 increase.
C) $124,000 increase.
D) $237,600 decrease.

Question

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:

$\begin{array}{|l|r|}
\hline \text { Direct Materials } & \$ 4.20 \
\hline \text { Direct Labour } & \$ 120 \
\hline \text { Variable Manufacturing Overhead } & \$ 5.80 \
\hline \text { Fixed Manufactiong Overhead } & \$ 6.50\
\hline
\end{array}$

Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $ \$ 25 $ per component. Assume that direct labour is a variable cost.
-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 not be affected by this decision.If Rodgers Company were to purchase the components rather than making them internally,what would be the impact on the company's annual operating income?
A) $81,000 decrease.
B) $94,500 increase.
C) $124,000 increase.
D) $237,600 decrease.

Quizplus · Accepted Answer

Purchasing the components instead of making them internally would eliminate the variable costs associated with production but would not affect the fixed costs, which are sunk in this scenario. The decision would lead to an increase in costs equal to the difference between the purchase price and the internal variable cost of production, resulting in a decrease in operating income.

The Rodgers Company Makes 27,000 Units of a Certain Component