Question

A supplier has offered to sell the component to Carver for per 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 annually. Assuming that Carver needs components annually and that the fixed manufacturing overhead is​ unavoidable, what would be the impact on operating income if Carver​ outsources?

Answer 1

A. Operating income would decrease by $100,000

Explanation:

The computation of the impact on operating income if Carver​ outsources is shown below:-

Particulars Per unit 3,000 units

Make Buy Make Buy

Direct material 410 1,230,000

Direct labor 110 330,000

Variable manufacturing

overhead 90 270,000

Opportunity cost 20,000

Purchase cost 650 1,950,000

Total cost 1,850,000 1,950,000

Operating income would decrease

= $1,950,000 - $1,850,000

= $10,000