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:

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