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:
The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

Question

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: 
The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company's net operating income as a result of buying the part from the outside supplier would be:

Quizplus · Accepted Answer

The current cost of producing 1,000 parts per year is: 
1,000 units x $25 per unit = $25,000.

If the part is purchased from an outside supplier at $20 per unit, the cost would be: 
1,000 units x $20 per unit = $20,000.

This would result in a cost savings of $5,000 ($25,000 – $20,000).

Two thirds of the fixed manufacturing costs can be eliminated, so the annual impact on the company's net operating income would be: 
$5,000 cost savings + (2/3 x fixed manufacturing costs) = $5,000 + (2/3 x fixed manufacturing costs)

The question does not provide information about the fixed manufacturing costs, so we cannot calculate the exact impact on net operating income. However, we know that the impact would be a decrease (because net operating income would increase if the cost savings were greater than the fixed manufacturing costs). Therefore, the best choice is D – $2,000 decrease.

Green Company Produces 1,000 Parts Per Year, Which Are Used