Ramon Corporation makes 18, 000 units of part E44 each year.This part is used in one of the company's products.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for $23.30 each.If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted, only $5, 000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part E44 would be used to make more of one of the company's other products, generating an additional segment margin of $21, 000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?
A)Net operating income would increase by $21, 000 per year.
B)Net operating income would increase by $18, 800 per year.
C)Net operating income would decrease by $123, 000 per year.
D)Net operating income would decrease by $165, 000 per year.

Question

Ramon Corporation makes 18, 000 units of part E44 each year.This part is used in one of the company's products.The company's Accounting Department reports the following costs of producing the part at this level of activity:  An outside supplier has offered to make and sell the part to the company for $23.30 each.If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted, only $5, 000 of these allocated general overhead costs would be avoided.In addition, the space used to produce part E44 would be used to make more of one of the company's other products, generating an additional segment margin of $21, 000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?
A)Net operating income would increase by $21, 000 per year. 
B)Net operating income would increase by $18, 800 per year. 
C)Net operating income would decrease by $123, 000 per year. 
D)Net operating income would decrease by $165, 000 per year.

Quizplus · Accepted Answer

Currently, the total cost of producing 18,000 units of part E44 internally is:

Direct materials: $13.50 * 18,000 = $243,000
Direct labor: $8.00 * 18,000 = $144,000
Variable overhead: $1.50 * 18,000 = $27,000
Supervisor's salary: $48,000
Allocated general overhead: $54,000

Total cost = $516,000

If the part is purchased from the outside supplier at $23.30 per unit, the cost would be $23.30 * 18,000 = $419,400.

In addition to the cost savings, the space used to produce part E44 can be used to produce another product, which generates an additional segment margin of $21,000 per year.

Therefore, the net impact on the company's overall net operating income would be:

Current cost - Cost from supplier + Allocated general overhead saved + Additional segment margin
= $516,000 - $419,400 + $5,000 + $21,000
= $122,600

This represents an increase in net operating income of $122,600 per year. However, since the question only provides options in increments of $5,000, the closest option is B, which is an increase of $18,800 per year.

Ramon Corporation Makes 18, 000 Units of Part E44 Each