Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is: The part can be purchased from an outside supplier at $20 per unit.If the part is purchased from the outside supplier,two thirds of the fixed manufacturing costs can be eliminated.The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

Question

Green Company produces 1,000 parts per year,which are used in the assembly of one of its products.The unit product cost of these parts is:  The part can be purchased from an outside supplier at $20 per unit.If the part is purchased from the outside supplier,two thirds of the fixed manufacturing costs can be eliminated.The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

Quizplus · Accepted Answer

The current cost of producing 1,000 parts internally is:
$11 x 1,000 = $11,000

If the part is purchased from an outside supplier, the cost would be:
$20 x 1,000 = $20,000

By purchasing the part from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated, which would be:

2/3 x $30,000 = $20,000

Therefore, the total cost of purchasing the parts from an outside supplier would be:

$20,000 + $20,000 = $40,000

The net operating income impact would be:

$11,000 - $40,000 = -$29,000

This means that the company would experience a net loss of $29,000 if it were to purchase the parts from the outside supplier.

Therefore, the best choice would be C, which is a $2,000 decrease in net operating income.

Green Company Produces 1,000 Parts Per Year,which Are Used in the Assembly