Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents results in the following costs: Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected.
-If Meacham decides to purchase the subcomponent from the outside supplier,how much higher or lower will net operating income be than if Meacham continued to make the subcomponent?
A)$45,000 higher
B)$70,000 higher
C)$30,000 lower
D)$70,000 lower

Question

Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents results in the following costs:  Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected.
-If Meacham decides to purchase the subcomponent from the outside supplier,how much higher or lower will net operating income be than if Meacham continued to make the subcomponent?
A)$45,000 higher 
B)$70,000 higher 
C)$30,000 lower 
D)$70,000 lower

Quizplus · Accepted Answer

If Meacham decides to purchase the subcomponent from the outside supplier, net operating income will be $45,000 higher than if Meacham continued to make the subcomponent. This is because the cost of purchasing the subcomponent from the outside supplier is $30,000 lower than the cost of making the subcomponent in-house, and the selling price of the subcomponent is the same regardless of whether it is made in-house or purchased from an outside supplier.

Meacham Company Has Traditionally Made a Subcomponent of Its Major