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:
$\begin{array}{ll}
\text { Direct materials } & \$ 42,000 \
\text { Direct labor } & 10,500 \
\text { Variable overhead costs } & 32,500 \
\text { Fixed overhead costs } & \underline{18,000} \
\quad \text { Total costs } & \$ 1103,000
\end{array}$
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

Quizplus · Accepted Answer

The cost to make the part is $110,300. If purchased, the cost is $94,750, plus 94% of fixed overhead ($16,920). The total cost to buy is $111,670, leading to a decrease in operating income of $8,670.

WTGinsburg Engine Company Manufactures Part ACT31107 Used in Several of Its