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.Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2,000 profit.If Jackson Corporation makes the part,what 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.Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2,000 profit.If Jackson Corporation makes the part,what will its operating income be?

Quizplus · Accepted Answer

B)
Purchase price $4.25 × 22,000 = $93,500
Unavoidable Fixed Cost 50% × $40,000 20,000
Less lost profit from new product (2,000)
Cost to buy $111,500
Current cost to produce 106,000
Difference 5,500

Part P40 Is a Part Used in the Production of Air