Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside supplier has offered to supply the components to Anderson at $66 per unit. Anderson's production costs are as follows: If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
If the offer is accepted, operating income will
A) increase by $100,000.
B) decrease by $70,000.
C) decrease by $30,000.
D) increase by $60,000.

Question

Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside supplier has offered to supply the components to Anderson at $66 per unit. Anderson's production costs are as follows:  If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
If the offer is accepted, operating income will
A) increase by $100,000. 
B) decrease by $70,000. 
C) decrease by $30,000. 
D) increase by $60,000.

Quizplus · Accepted Answer

Anderson Co.'s production costs are $52 per unit ($20 variable + $24 fixed + $8 overhead). If they accept the offer from the outside supplier at $66 per unit, they will save $14 per unit ($66 - $52), but they will also lose the $8 of fixed overhead per unit.

Thus, the net savings per unit will be $6 ($14 - $8). Multiplied by the 5,000 units they use each year, the total savings will be $30,000 ($6 * 5,000).

Therefore, accepting the offer will decrease Anderson's operating income by $30,000.