The Rodgers Company Makes 27,000 Units of a Certain Component

question 17

Multiple Choice

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 4.20 \\\hline \text { Direct Labour } & \$ 120 \\\hline \text { Variable Manufacturing Overhead } & \$ 5.80 \\\hline \text { Fixed Manufactiong Overhead } & \$ 6.50\\\hline\end{array}$

Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $\$ 25$ per component. Assume that direct labour is a variable cost.
-Assume that if the components were to be purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided,and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,what would be the impact on annual operating income due to accepting the offer?

• A) $18,900 increase.
• B) $18,900 decrease.
• C) $21,400 increase.
• D) $21,400 decrease.

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