Question

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part​ P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce Jackson Corporation can purchase the part from an outside supplier for per unit. If they purchase from the outside​ supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the​ part, how much will its operating income​ be?

Answer 1

Question

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part​ P40:

Number of parts produced annually 26,000

Fixed cost $43,000

Variable cost 70,000

Total cost to produce 113,000

Jackson Corporation can purchase the part from an outside supplier for $4.62 per unit. If they purchase from the outside​ supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the​ part, how much will its operating income​ be?

Answer:

Change in operating income= $28,620

Step-by-step explanation:

$

Total variable cost of making 70,000

Total cost of external purchase ($4.62×26,000) 120,120

Extra variable cost from external purchase 50,120

less Savings in fixed overheads(50%×43,000) ( 21,500)

Change in operating income 28,620

Note that the the balance of the fixed cost (50% of $43,000= 21500) were not included because they not relevant for the decision. They would be incurred either way.

Change in operating income= $28,620