Fair Engineering Company manufactures part QE767 used in several of its engine models. Monthly production costs for 10,000 units are as follows:
It is estimated that 20% of the fixed support costs assigned to part QE767 will no longer be incurred if the company purchases the part from the outside supplier. Fair Engineering Company has the option of purchasing the part from an outside supplier at $16 per unit.
-If Fair Engineering Company purchases 10,000 QE767 parts from the outside supplier per month,then its monthly operating income will:
A)decrease by $2,000.
B)increase by $30,000.
C)decrease by $16,000.
D)decrease by $58,000.

Question

Fair Engineering Company manufactures part QE767 used in several of its engine models. Monthly production costs for 10,000 units are as follows:
 It is estimated that 20% of the fixed support costs assigned to part QE767 will no longer be incurred if the company purchases the part from the outside supplier. Fair Engineering Company has the option of purchasing the part from an outside supplier at $16 per unit.
-If Fair Engineering Company purchases 10,000 QE767 parts from the outside supplier per month,then its monthly operating income will:
A)decrease by $2,000. 
B)increase by $30,000. 
C)decrease by $16,000. 
D)decrease by $58,000.

Quizplus · Accepted Answer

A)Avoidable costs $158,000 - ($16 × 10,000 units)= decrease of $2,000

Fair Engineering Company Manufactures Part QE767 Used in Several of Its