Question

W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for​ 1,000 units are as​ follows: Direct materials ​$42,000 Direct labor ​10,500 Variable overhead costs ​32,500 Fixed overhead costs ​18,000 Total costs ​$103,000 It is estimated that​ 6% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at​ $94.75 per unit. If W.T. Ginsburg Engine Company purchases​ 1,000 ACT31107 parts from the outside supplier per​ month, then its monthly operating income will​ ________. (Round any intermediary calculations and your final answer to the nearest​ cent.) A. increase by​ $8,670 B. increase by​ $21,330 C. decrease by​ $8,670 D. decrease by​ $21,330

Answer 1

Answer:

Option (C) is correct.

Explanation:

Total relevant cost to make:

= Direct material + Direct labor + Variable overhead + Fixed overhead

= $42,000 + $​10,500 + $32,500 + (6% × $18,000)

= $42,000 + $​10,500 + $32,500 + $1,080

= $86,080

Purchase cost = 1,000 × 94.75

                        = $94,750

Therefore, the monthly operating income will decrease by:

= $94,750 - $86,080

= $8,670