ILF makes 2,000 waterproof mattresses annually to be used in one of its products. The unit cost of the mattresses includes variable costs of $45 and fixed costs of $30. If the mattresses were purchased from an outside supplier, 60% of the fixed costs could be eliminated. Buying mattresses from an outside supplier at a price of $50 each would cause ILF's operating income to:
A) Increase by $26,000.
B) Increase by $30,000.
C) Increase by $6,000.
D) Decrease by $10,000.

Question

Quizplus · Accepted Answer

If the mattresses were purchased from an outside supplier, 60% of the fixed costs could be eliminated. So, the fixed cost per mattress would be reduced by $30 * 0.6 = $18. The total fixed cost saving would be $18 * 2,000 = $36,000. The variable cost per mattress would remain the same at $45. So, the total variable cost would be $45 * 2,000 = $90,000. The total cost of purchasing mattresses from an outside supplier would be $50 * 2,000 = $100,000. So, the total cost saving would be $100,000 - $90,000 - $36,000 = $26,000.

ILF Makes 2,000 Waterproof Mattresses Annually to Be Used in One