CM Manufacturing Has Provided the Following Unit Costs Pertaining to a Component

question 157

Multiple Choice

CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 315 \\\hline \text { Direct labor (variable) } & 96 \\\hline \text { Variable manufacturing overhead } & 72 \\\hline \text { Fixed manufacturing overead } & 29 \\\hline\end{array}$$
A supplier has offered to provide the component to CM manufacturing for $500 per unit. If CM Manufacturing were to buy the component from the supplier, they could use the released facilities to manufacture a product which would generate contribution margin of $16,000 annually. Assuming that CM Manufacturing needs 2,000 components annually and the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if the company outsources?

• A) Operating income would go down by $18,000.
• B) Operating income would go up by $2,000.
• C) Operating income would go down by $12,000.
• D) Operating income would go up by $4,000.

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Definitions:

Energy Intake

The total amount of energy consumed from food and beverages over a particular period, typically measured in calories or joules.

Body Mass Index

A numerical computation that compares a person's weight and height to determine their overall body fat and categorize their weight status.

Nutrient Detectors

Specialized cells or mechanisms in the body that sense and respond to specific nutrients, helping to regulate dietary intake and nutritional status.

Blood Glucose

The concentration of glucose present in the blood, essential for providing energy to cells throughout the body.