Part P40 Is a Part Used in the Production of Air

question 101

Multiple Choice

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Jackson Corporation can purchase the part from an outside supplier for $4.67 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2500 profit. If Jackson Corporation makes the part, what will its operating income be?

• A)$12,410 less than if the company bought the part
• B)$12,410 greater than if the company bought the part
• C)$17,410 greater than if the company bought the part
• D)$126,410 greater than if the company bought the part

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Definitions:

Estimated Cost

An approximation of the cost to produce goods or services, used for budgeting and planning.

Activity-Based Costing

A costing method that assigns overhead and indirect costs to related products and services based on their usage of the resources.

Materials Handling

The movement, protection, storage, and control of materials and products throughout manufacturing, warehousing, distribution, and disposal processes.

Estimated Manufacturing Overhead

The forecasted indirect costs associated with the production process, not directly tied to specific units.