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:
$\begin{array}{|l|r|}
\hline \text { Variable Manufacturing Cost } & \$ 12 \
\hline \text { Fixed Manufacturing Cost } & \$ 9 \
\hline \text { Unit Product Cost } & \$ 21 \
\hline
\end{array}$
The part can be purchased from an outside supplier for $20 per unit.If the part is purchased from the outside supplier,two-thirds of the fixed manufacturing costs can be eliminated.What will be the annual impact on the company's operating income of buying the part from the outside supplier? (Do not round intermediate calculations.)

Question

Quizplus · Accepted Answer

If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. The fixed manufacturing cost is $9 per unit, so two-thirds of that is $6 per unit. The variable manufacturing cost is $12 per unit, so the total cost of producing the part in-house is $21 per unit. The cost of purchasing the part from the outside supplier is $20 per unit. Therefore, the annual impact on the company's operating income of buying the part from the outside supplier will be a decrease of $2,000 (1,000 units x $2 per unit).

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