Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the part, how much will its operating income be?

Question

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40:  Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the part, how much will its operating income be?

Quizplus · Accepted Answer

Let's start with calculating the total cost of producing Part P40 in-house:
Variable costs per unit = $4.50 + $1.75 + $2.40 + $0.60 = $9.25
Fixed costs = $110,000

Total cost per unit = Variable costs per unit + (Fixed costs/Number of units produced)
= $9.25 + ($110,000/25,000)
= $13.65

If the company buys the part from the outside supplier, the cost per unit would be $4.25. However, only 50% of fixed costs would be incurred, which is $55,000.

Total cost per unit = $4.25 + ($55,000/25,000)
= $6.35

Operating income per unit = Selling price - Total cost per unit
= $20 - $13.65 = $6.35

If the company makes the part, the operating income per unit will be $20 - $13.65 = $6.35. If the company buys the part, the operating income per unit will be $20 - $6.35 = $13.65 - $4.25 = $9.40.

Therefore, the company's operating income will be $7,500 greater if it makes the part in-house compared to buying it from the supplier.

Part P40 Is a Part Used in the Production of Air