Cotton Corp currently makes 10,000 subcomponents a year in one of its factories.The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price.Fixed overhead is not avoidable.If Cotton Corp accepts the outside offer,what will be the effect on short-term profits?

A)$260,000 increase
B)$195,000 decrease
C)no change
D)$65,000 increase

Question

Cotton Corp currently makes 10,000 subcomponents a year in one of its factories.The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price.Fixed overhead is not avoidable.If Cotton Corp accepts the outside offer,what will be the effect on short-term profits?

A)$260,000 increase 
B)$195,000 decrease 
C)no change 
D)$65,000 increase

Quizplus · Accepted Answer

The current cost to produce 10,000 subcomponents is not given in the question, so we cannot calculate the profit margin or compare it to the outside supplier's price. However, since fixed overhead is not avoidable, and Cotton Corp can purchase the subcomponents from the outside supplier at a lower price, accepting the offer will reduce the cost of goods sold and increase short-term profits. The decrease in profit can be calculated as follows:
Decrease in profit = (current unit cost - outside supplier's unit cost) x number of subcomponents
= ($84.50 - current unit cost) x 10,000
Since we don't know the current unit cost, we cannot calculate the exact decrease in profit. However, since the outside supplier's unit cost is lower than the current cost to produce, the decrease in profit will be a positive number. Therefore, only option B is correct, and the most reasonable choice.

Cotton Corp Currently Makes 10,000 Subcomponents a Year in One