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:

Subscription Price

The cost for purchasing a subscription to a service or product, typically charged on a recurring basis.

Ownership Position

A stake or interest that a person or entity holds in a company, typically through the ownership of shares.

Ownership Position

A stake or interest that one holds in a company or property, often reflected by the amount of shares owned or the extent of investment.

Current Market Price

The current price at which an asset or security can be bought or sold in the market.