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

Answer 1

A. Operating income would decrease by $100,000

Step-by-step explanation:

The computation is shown below:

(Amount in dollars, commas)

Particulars 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

As we can see that the operating income is decreased by $100,000