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

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

Quizplus · Accepted Answer

Anderson is currently making the components at a variable cost of $60 and a fixed cost of $12 per unit ($20 + $8). If they accept the offer from the outside supplier, they will buy the components at $66 per unit and eliminate the $8 of fixed overhead per unit.

The new variable cost per unit will be $66 (the cost from the outside supplier).

Therefore, Anderson will save $6 per unit on fixed overhead ($12 - $8) and lose $6 per unit on variable cost ($60 - $66).

Total annual savings due to the elimination of fixed overheads = $6 × 5,000 = $30,000 
Total annual incremental cost due to the purchase of components from outside = $6 × 5,000 = $30,000

So, the net effect on the operating income will be zero, and Anderson's operating income will decrease by $30,000 if they accept the offer, as compared to if they make the components on their own.

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