Harris Company Uses 5,000 Units of Part AA1 Each Year

question 3

Multiple Choice

Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows: An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier, annual profits will

• A) increase by £29,000.
• B) increase by £14,500.
• C) increase by £22,000.
• D) increase by £2,500.

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Definitions:

Interest Rates

The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.

Nominal Rate

The interest rate set by the lending institution, not adjusted for inflation, representing the actual yearly cost of funds over the term of a loan.

Compounding Period

The period of time after which interest is credited to the depositor’s account for purposes of computing subsequent interest.

Interest Rate

The percentage charged on a loan or paid on savings over a specific period, usually expressed as an annual percentage of the principal.