DC Electronics Uses a Standard Part in the Manufacture of Several

question 32

Multiple Choice

DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can earn profit of $11,600. If DC outsources, what will the effect on operating income be?

• A) Up $15,000
• B) Down $13,300
• C) Down $24,900
• D) Up $3,400

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Definitions:

Allowable Costs

Expenses that can be charged to a project, as defined by contractual agreements or regulatory guidelines.

Price Adjustment Contract

A contract that allows for changes in price based on certain conditions, such as inflation rates or cost increases.

Fixed Price

A contract method where the service or product is provided at a set price, regardless of the actual costs incurred.

Inflation Adjusted Price

A price that has been modified to reflect the changes in purchasing power due to inflation, allowing for comparison over time.