Aircraft Products,a manufacturer of aircraft landing gear,makes 1,000 units each year of a special valve used in assembling one of its products.The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60.The valves could be purchased from an outside supplier at $77 each.If the valve were purchased from the outside supplier,40% of the total fixed costs incurred in producing this valve could be eliminated.Buying the valves from the outside supplier instead of making them would cause the company's operating income to:

Question

Quizplus · Accepted Answer

Total cost of producing 1,000 valves in-house:
Variable costs: 1000 units x $70 per unit = $70,000
Fixed costs: $60 per unit x 1,000 units = $60,000
Total cost = $130,000

Total cost of purchasing 1,000 valves from outside supplier:
1,000 units x $77 per unit = $77,000
Fixed cost savings: $60 per unit x 1,000 units x 40% = $24,000
Total cost = $53,000

Therefore, the cost savings from purchasing the valves from an outside supplier would be:
$130,000 - $53,000 = $77,000

Since the operating income would increase by the amount of cost savings, the answer is B) Increase by $17,000.

Aircraft Products,a Manufacturer of Aircraft Landing Gear,makes 1,000 Units Each