Figure 13-7.Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows:

-Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier?
A) No, income will decrease by $71,500.
B) No, income will decrease by $15,000.
C) Yes, income will increase by $74,500.
D) No, income will decrease by $10,500.
E) Yes, income will increase by $10,500.

Question

Figure 13-7.Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house. An outside company has offered to supply one component, part number X76, for $12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows:
 
-Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier?
A) No, income will decrease by $71,500. 
B) No, income will decrease by $15,000. 
C) Yes, income will increase by $74,500. 
D) No, income will decrease by $10,500. 
E) Yes, income will increase by $10,500.

Quizplus · Accepted Answer

If 30% of the fixed overhead is avoidable, then $6,000 (30% of $20,000) of the fixed overhead would not be incurred if part X76 is not made by Ring. The original analysis without considering the avoidable fixed costs showed that making the part is cheaper by $10,500 than buying it. If you avoid $6,000 in costs by not making the part, the total savings by making the part instead of buying it decreases to $4,500 ($10,500 - $6,000). However, this question's correct answer mistakenly assumes that avoiding $6,000 in costs would lead to a decrease in income if the part is purchased, which is not directly supported by the provided choices. The correct approach should compare the cost of making versus buying, including the savings from avoiding some fixed costs. The provided choices do not accurately reflect this calculation, leading to confusion. The explanation intended to highlight the importance of considering avoidable costs in make-or-buy decisions, but the specific numerical answer given does not align with the typical outcome of such an analysis.