Question

Green company produces 1,000 parts per year, which are used in the assembly of one of its products. the unit product cost of these parts is: variable manufacturing cost $12 fixed manufacturing cost $9 unit product cost $21 the part can be purchased from an outside supplier for $20 per unit. if the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. what will be the annual impact on the company's operating income of buying the part from the outside supplier? (do not round intermediate calculations.)

a. $1,000 increase.
b. $1,000 decrease.
c. $2,000 decrease.
d. $5,000 increase.

Answer 1

The annual impact on the company's operating income of buying the part from the outside supplier is a $5,000 decrease. The negative sign indicates a decrease in operating income. Therefore, the correct answer is $5,000 decrease (D).

Step-by-step explanation:

To determine the annual impact on the company's operating income of buying the part from the outside supplier, we need to compare the costs of producing the part internally with the costs of purchasing it externally.

Currently, the unit product cost of producing the part internally is $21, which is the sum of the variable manufacturing cost of $12 and the fixed manufacturing cost of $9.

If the company purchases the part from the outside supplier for $20, it can eliminate two-thirds of the fixed manufacturing costs, which is $6 ($9 × 2/3).

The new unit product cost of purchasing the part externally would be $20 + $6 = $26, as the fixed manufacturing cost is eliminated.

Since the company produces 1,000 parts per year, the annual impact on the company's operating income of buying the part from the outside supplier can be calculated as follows:

(Unit product cost of producing internally - Unit product cost of purchasing externally) × Number of parts produced

($21 - $26) × 1,000 = -$5,000

The negative sign indicates a decrease in operating income. Therefore, the correct answer is $5,000 decrease (D).