CM Company Manufactures a Component Used in the Production of One

question 7

Multiple Choice

CM Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 420 \\\hline \text { Direct labor (variable) } & 110 \\\hline \text { Variable manufacturing overhead } & 80 \\\hline \text { Fixed manufacturing overhead } & 30 \\\hline\end{array}$$ A supplier has offered to sell the component to CM for $650 per unit.If CM 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 CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable,what would be the impact on operating income if CM outsources?

• A)Operating income would decrease by $150,000.
• B)Operating income would increase by $10,000.
• C)Operating income would decrease by $10,000.
• D)Operating income would increase by $160,000.

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