Carver Company Manufactures a Component Used in the Production of One

question 66

Multiple Choice

Carver Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 420 \\\hline \text { Direct labor (variable) } & 100 \\\hline \text { Variable manufacturing overhead } & 90 \\\hline \text { Fixed manufacturing overhead } & 30 \\\hline\end{array}$$ A supplier has offered to sell the component to Carver for $650 per unit.If Carver buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually.Assuming that Carver needs 3000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if Carver outsources?

• A)Operating income would decrease by $110,000.
• B)Operating income would increase by $10,000.
• C)Operating income would decrease by $10,000.
• D)Operating income would increase by $120,000.

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Definitions:

Book Value

The net value of a company’s assets as recorded on the balance sheet, calculated as total assets minus liabilities and intangible assets.

Opportunity Cost

The potential benefit that is given up when one alternative is selected over another.

Variable Costs

Costs that vary directly with the level of production or sales volume, such as materials and labor.

Eliminate

To completely remove or get rid of something.