Anderson Co.makes and uses 5,000 components each year in its manufacturing operations.An outside supplier has offered to supply the components to Anderson at $66 per unit.Anderson's production costs are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 8 \
\text { Direct labor } & 32 \
\text { Variable overhead } & 12 \
\text { Fixed overhead (based on normal capacity) } & 34
\end{array}$ If Anderson accepts the order,$8 of fixed overhead per unit will be eliminated.
If the offer is accepted,operating income will

Question

Quizplus · Accepted Answer

Anderson Co.'s production cost per unit is $100 ($40 variable cost + $52 fixed cost + $8 eliminated fixed overhead). If Anderson Co. accepts the offer, it will have to pay $66 per unit to the outside supplier, which is $26 more than its own production cost.

Therefore, Anderson Co. would incur an additional cost of $26 x 5,000 units = $130,000 per year. This would result in a decrease in operating income of $130,000 - $100,000 (elimination of fixed overhead) = $30,000.

Hence, the best choice is C.

Anderson Co If Anderson Accepts the Order,$8 of Fixed Overhead Per Unit