A manufacturing company makes 4,200 parts per year. These parts are used in the

Question

A manufacturing company makes 4,200 parts per year. These parts are used in the assembly of one of the company's products. The unit product cost of these parts is: The part can be purchased from an outside supplier at $40.20 per unit. If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be estimated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be: $18,480 decrease $7,560 decrease $18,480 decrease $7,560 decrease

Explanation / Answer

Solution.

1. If company purchase parts from out side supplier then company variable cost of part is incresed by .

$32.20 to $40.20

2. But Company can also save there 2/3rd of fixed cost.

Which is $18.60 x 2 / 3 = $12.40

Therefore new cost of part is

Variable cost per unit                         = $40.20

Fixed manufectureing cost                = $6.20

Total                                                      =$46.40

Incresment in net opereting income =

Previous cost                                      = $50.80

New cost                                              =$46.40

Saveing                                                =$4.40

Annual Saveing     = 4200 unit x $4.40 = $18,480. (Increase)

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