Question

Aircraft Products, a manufacturer of aircraft landing gear, makes 1,000 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60. The valves could be purchased from an outside supplier at $77 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:

Answer 1

$17,000

Step-by-step explanation:

The computation of operating income is shown below:-

Costs to Make = $70 + $60

= $130

Costs to Buy = $77 + ($60 × 0.6)

= $113

Increase in the operating Income = (Costs to Make - Costs to Buy) × Units each year

= ($130 - $113) × 1,000 Units

= $17,000

Therefore for computing the Increase in the operating Income we simply put the above formula.