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

question 12

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: 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:

Injunctions

Court orders that either restrain a party from undertaking certain actions or require them to perform specific acts, often used in labor disputes to limit the actions of labor organizations or employers.

Picketing

Demonstrating or marching before a place of employment or work site by workers to protest labor conditions or policies.

Unionization

The process by which workers come together to form a union in order to negotiate collectively with their employer regarding wages, benefits, and working conditions.

Sherman Antitrust Act

A federal statute passed in 1890 that aims to promote competition by prohibiting monopolies, cartels, and trusts that restrict trade.