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: Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier.
-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 Rodgers Company purchases the components rather than making them internally,what would be the impact on the company's annual net operating income?
A)$94,500 increase
B)$81,000 decrease
C)$237,600 decrease
D)$124,000 increase

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:  Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier.
-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 Rodgers Company purchases the components rather than making them internally,what would be the impact on the company's annual net operating income?
A)$94,500 increase 
B)$81,000 decrease 
C)$237,600 decrease 
D)$124,000 increase

Quizplus · Accepted Answer

If the company purchases the components rather than making them internally, it will save $81,000 in variable costs. However, the fixed overhead costs will still be incurred, resulting in a decrease in net operating income.

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