Carver Company manufactures a component used in the production of one of its mai

Question

Carver Company manufactures a component used in the production of one of its main products. The following cost information is available: Direct materials Direct labor (variable) Variable manufacturing overhead Fixed manufacturing overhead $410 100 90 35 A supplier has offered to sell the component to Carver for $630 per unit. If Carver buys the component from the supplier, the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually. Assuming that Carver needs 3,000 components annually and that the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if Carver outsources? O A. Operating income would increase by $90,000. B. Operating income would increase by $10,000 C. Operating income would decrease by $10,000. D. Operating income would decrease by $80,000

Explanation / Answer

Direct Material

410

Direct Labour

100

Variable manufacturing O/H

90

Variable cost to manufacture 1 unit

600

Loss on purchase component from outside supplier

(630 – 600) * 3000 units

90000

(-) Contribution from released facility

10000

Operating Income would Decrease by

80000

Present Value of Future cash flow from Proposal X :-

PVAF for 5 years @ 10% = 3.791

PVIF for 5th year @ 10% = 0.621

PV of annual cash inflow (164000 * 3.791)

621724

PV of Residual value (64000 * 0.621)

39744

Present Value of Future cash flow

661468

NPV = 661468 – 728000 = -66532

Direct Material

410

Direct Labour

100

Variable manufacturing O/H

90

Variable cost to manufacture 1 unit

600

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