Carver Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 410 \
\hline \text { Direct labor (variable) } & 110 \
\hline \text { Variable manufacturing overhead } & 80 \
\hline \text { Fixed manufacturing overhead } & 35 \
\hline
\end{array}$$ A supplier has offered to sell the component to Carver for $640 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 $20,000 annually.Assuming that Carver needs 3000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if Carver outsources?

Question

Carver Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 410 \
\hline \text { Direct labor (variable) } & 110 \
\hline \text { Variable manufacturing overhead } & 80 \
\hline \text { Fixed manufacturing overhead } & 35 \
\hline
\end{array}$$ A supplier has offered to sell the component to Carver for $640 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 $20,000 annually.Assuming that Carver needs 3000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if Carver outsources?

Quizplus · Accepted Answer

If Carver outsources, it will save the variable costs of production (direct materials, direct labor, and variable manufacturing overhead) of $500 per unit (410+110+80). However, it will lose the contribution margin of $20,000 from the product that could be manufactured with the released facilities. Therefore, the net impact on operating income would be a decrease of $100,000 (3000 units x $500 - $20,000).

Carver Company Manufactures a Component Used in the Production of One