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

If Green Company produces the parts, the unit product cost is $30 per unit ($10 variable cost + $20 fixed cost/1,000 units). Therefore, the total annual cost of producing these parts is $30,000 (1,000 units * $30 per unit).

If Green Company purchases the parts from the outside supplier, the unit cost is $20 per unit. Therefore, the total annual cost of purchasing these parts is $20,000 (1,000 units * $20 per unit). Additionally, two-thirds of the fixed manufacturing costs can be eliminated, resulting in a savings of $6,667 ($10,000 * 2/3).

Therefore, the total annual cost of purchasing the parts and eliminating two-thirds of the fixed manufacturing costs is $26,667 ($20,000 + $10,000 - $6,667).

The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be a decrease of $2,333 ($30,000 - $26,667).

Therefore, the best choice is C, a $2,000 decrease.

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