Part Z45 Is a Part Used in the Production of Blenders

question 85

Multiple Choice

Part Z45 is a part used in the production of blenders at Andrew Corporation.The following costs and data relate to the production of Part Z45: $$\begin{array} { | l | c c | } \hline \text { Number of parts produced annually } & & 20,000 \\\hline \text { Fixed costs } & \$ & 40,000 \\\hline \text { Variable costs } & \mathbf { \$ } & 66,000 \\\hline \text { Total cost to produce } & \$ & 106,000 \\\hline\end{array}$$ Andrew Corporation can purchase the part from an outside supplier for $4.25 per unit.If they purchase from the outside supplier,40% of the fixed costs would be avoided.
-Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2,000 profit.If Andrew Corporation makes the part,what will its operating income be?

• A)$1,000 less than if the company bought the part
• B)$5,000 greater than if the company bought the part
• C)$1,000 greater than if the company bought the part
• D)$107,000 greater than if the company bought the part

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Definitions:

Absorption Cost

A comprehensive approach to product costing that includes all types of manufacturing costs: direct materials, direct labor, and both fixed and variable manufacturing overhead.

Overhead Absorption Rate

The rate at which indirect costs are allocated to produced goods or services.

ABC System

Activity-Based Costing; a method of assigning overhead and indirect costs to specific products or projects, based on their usage of activities.

Single-Base Allocation

A cost allocation method where overhead costs are distributed based on a single criterion or cost driver.