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

question 7

Multiple Choice

Composite 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 Composite Company unlimited quantities of part AA1 at a unit cost of $32.00. If Composite 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 Composite Company accepts the offer of the outside supplier, annual profits will

• A) increase by $17,000.
• B) increase by $24,000.
• C) increase by $34,000.
• D) increase by $3,500.

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Definitions:

Left Ventricle

The chamber of the heart that receives oxygenated blood from the left atrium and pumps it out through the aorta to circulate oxygen-rich blood throughout the body.

Aorta

The largest artery in the body, which carries oxygen-rich blood from the left ventricle of the heart to various parts of the body.

Pulmonary Arteries

The blood vessels that transport blood lacking oxygen from the heart to the lungs to be oxygenated.

Right Atrium

The right upper chamber of the heart that receives deoxygenated blood from the body through the vena cava and pumps it into the right ventricle.