Carver Company Manufactures a Component Used in the Production of One

question 110

Multiple Choice

Carver Company manufactures a component used in the production of one of its main products.The following cost information is available: $$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 410 \\\hline \text { Direct labor (variable) } & 110 \\\hline \text { Variable manufacturing overhead } & 80 \\\hline \text { Fixed manufacturing overhead } & 35 \\\hline\end{array}$$ A supplier has offered to sell the component to Carver for $640 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 $20,000 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 $100,000.
• B) Operating income would increase by $20,000.
• C) Operating income would decrease by $20,000.
• D) Operating income would increase by $120,000.

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Definitions:

Net

Typically refers to the amount remaining after certain deductions are made, such as net income or net profit.

Variable Cost

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

Carrying Cost

The total cost associated with holding inventory, including storage, insurance, taxes, and potential obsolescence.