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:

Default Risk Premiums

The additional yield that investors demand for holding a bond that has a risk of default over a risk-free security.

Treasury Bond

A long-term, interest-bearing security issued by the government, with a maturity period typically longer than ten years.

Xerox

A corporation known primarily for its photocopying products and technology, though it has diversified into digital printing and document solutions.