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. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Ring purchase the part from the outside supplier?
A) Yes, income will increase by $104,500.
B) No, income will decrease by $104,500.
C) Yes, income will increase by $78,500.
D) Yes, income will increase by $95,500.
E) Yes, income will increase by $137,500.

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. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Ring purchase the part from the outside supplier?
A) Yes, income will increase by $104,500. 
B) No, income will decrease by $104,500. 
C) Yes, income will increase by $78,500. 
D) Yes, income will increase by $95,500. 
E) Yes, income will increase by $137,500.

Quizplus · Accepted Answer

Since the fixed overhead is unavoidable, the relevant costs are the variable costs. If the cost of purchasing the part from the supplier is higher than the variable cost of making it, income will decrease.