Carmine Company Uses 4,000 Units of a Product Each Year

question 71

Multiple Choice

Carmine Company uses 4,000 units of a product each year. The cost of manufacturing one unit at this volume is as follows: $\begin{array}{lr}\text { Direct materials } & \$ 10.00 \\\text { Direct labor } & 14.00 \\\text { Variable overhead } & 5.00 \\\text { Fixed overhead } & 3.00 \\\text { Total } & \$ 32.00\end{array}$ An outside supplier has offered to sell Carmine Company unlimited quantities at a unit cost of $30.00. If Carmine Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to the product. Furthermore, the space devoted to the manufacture of the product would be rented to another company for $18,000 per year. If Carmine Company accepts the offer of the outside supplier, annual profits will:

• A)increase by $26,000.
• B)increase by $16,000.
• C)increase by $20,000.
• D)decrease by $20,000.

---

Definitions:

Inventory Holding Cost

Expenses associated with storing unsold goods, including warehousing, insurance, taxes, depreciation, and opportunity costs of capital tied up in inventory.

Marginal Subcontracting Cost

The extra expense associated with outsourcing an additional unit of production or service.

Layoff Cost

The financial impact associated with the termination of employees traditionally as a result of downsizing, restructuring, or automation.

Hiring And Training Cost

Expenses incurred in recruiting, hiring, and training new employees.