Reference: 09-11
Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: $$\begin{array} { | l | l | }
\hline \text { Direct materials } & \$ 4.20 \
\hline \text { Direct labour } & \$ 12.00 \
\hline \text { Variable manufacturing overhead } & \$ 5.80 \
\hline \text { Fixed manufacturing overhead } & \$ 6.50 \
\hline
\end{array}$$ Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost.
-Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rogers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income?
A)$81,000 decrease.
B)$94,500 increase.
C)$124,000 increase.
D)$237,600 decrease.

Question

Reference: 09-11
Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: $$\begin{array} { | l | l | } 
\hline \text { Direct materials } & \$ 4.20 \
\hline \text { Direct labour } & \$ 12.00 \
\hline \text { Variable manufacturing overhead } & \$ 5.80 \
\hline \text { Fixed manufacturing overhead } & \$ 6.50 \
\hline
\end{array}$$ Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost.
-Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rogers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income?
A)$81,000 decrease.
B)$94,500 increase.
C)$124,000 increase.
D)$237,600 decrease.

Quizplus · Accepted Answer

Purchasing the component externally at $25 each for 27,000 units would cost $675,000 annually. Currently, the cost to produce internally is $28.50 per unit ($4.20 for materials, $12.00 for labor, $5.80 for variable overhead, and $6.50 for fixed overhead), totaling $769,500 annually. Switching to the external supplier would save $94,500 annually, but since the fixed costs of $175,500 ($6.50 per unit for 27,000 units) would remain unchanged, the actual decrease in net operating income would be the difference between the $94,500 savings and the $175,500 fixed costs that would still be incurred, resulting in an $81,000 decrease in annual net operating income.

Reference: 09-11 Rodgers Company Makes 27,000 Units of a Certain

Reference: 09-11
Rodgers Company Makes 27,000 Units of a Certain