Watson Wheels Currently Makes 6,000 Wheels Annually That Are Used

question 125

Multiple Choice

Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures. Current unit costs for the wheels are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 22.00 \\\text { Direct labor } & 16.00 \\\text { Variable manufacturing overhead } & 12.00 \\\text { Fixed manufacturing overhead } & \underline{15.00} \\\text { Total } & \$ 65.00\end{array}$ The company has an offer from a manufacturer to produce the wheels for $60 per wheel. If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually. In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels. If the company decides to accept the offer, what is the incremental effect on the company's net income?

• A) A savings of $7,000
• B) A savings of $37,000
• C) A decrease in net income of $15,000
• D) An increase in net income of $52,000

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Definitions:

Time To Maturity

The duration remaining until the final repayment date of a bond or other fixed-income security. It decreases as the bond approaches its maturity date.

Coupon Rate

Each year, the interest rate given on a bond calculated as a percentage of its nominal value.

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates, expressed in years.

Interest Rate Risk

The potential for investment losses due to fluctuations in interest rates, affecting the value of interest-bearing assets.