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

Answer:

A. Operating income would decrease by $100,000

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