The 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: Rodgers 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 labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier.
-Assume that if the component is purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,then the impact on annual net operating income due to accepting the offer would be:
A)$18,900 decrease
B)$18,900 increase
C)$21,400 decrease
D)$21,400 increase

Question

The 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:  Rodgers 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 labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier.
-Assume that if the component is purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,then the impact on annual net operating income due to accepting the offer would be:
A)$18,900 decrease 
B)$18,900 increase 
C)$21,400 decrease 
D)$21,400 increase

Quizplus · Accepted Answer

By purchasing the component, Rodgers avoids $35,100 in fixed overhead and gains $64,800 in rental income, totaling $99,900 in savings. If the cost to buy the component is less than this amount, net operating income increases. The problem implies this is the case, leading to an $18,900 increase in net operating income.

The Rodgers Company Makes 27,000 Units of a Certain Component