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

question 31

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 there is no other use for the capacity now being used to produce the component,and the total fixed manufacturing overhead of the company would not be affected by this decision.If Rodgers Company were to purchase the components rather than making them internally,what would be the impact on the company's annual operating income?

• A) $81,000 decrease.
• B) $94,500 increase.
• C) $124,000 increase.
• D) $237,600 decrease.

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Definitions:

Congressional Earmark

Provisions within legislation that direct approved funds to be spent on specific projects or for certain purposes, often critiqued for being non-competitive.

Specific Project

A particular and clearly defined piece of work or plan, often with set objectives, timeline, and resources allocated to its completion.

Deficit Spending

The practice of spending more money than is received in revenue, usually referring to government spending exceeding tax revenues.

Redistricting

The process of drawing electoral district boundaries, often criticized for practices like gerrymandering, where it's done to favor a particular political party.