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: $410
Direct labor (variable): $110
Variable manufacturing overhead: $90
Fixed manufacturing overhead: $30

A supplier has offered to sell the component to Carver for $650 a 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 $20,000 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?

A. Operating income would decrease by $100,000
B. Operating income would incrase by $120,000
C. Operating income would decrease by $20,000
D. Operating income would increase by $20,000

Explanation / Answer

Per unit 3000 units Make Buy Make Buy Direct materials 410 1230000 Direct labor 110 330000 Variable manufacturing overhead 90 270000 Opportunity cost 20000 Purchase cost 650 1950000 Total cost 1850000 1950000 Operating income would decrease by $100,000(1950000-1850000) Option A is correct

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