ILF Makes 2,000 Waterproof Mattresses Annually to Be Used in One

question 57

Multiple Choice

ILF makes 2,000 waterproof mattresses annually to be used in one of its products. The unit cost of the mattresses includes variable costs of $45 and fixed costs of $30. If the mattresses were purchased from an outside supplier, 60% of the fixed costs could be eliminated. Buying mattresses from an outside supplier at a price of $50 each would cause ILF's operating income to:

• A) Increase by $26,000.
• B) Increase by $30,000.
• C) Increase by $6,000.
• D) Decrease by $10,000.

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Definitions:

Units Produced

The total number of units of product completed in a given period by a company.

Contribution Margin

The amount remaining from sales revenue after variable expenses are deducted, contributing to covering fixed costs and generating profit.

Average Costs

The total costs (fixed and variable) divided by the total quantity produced, indicating the cost per unit of output on average.

Selling Price

The amount of money charged for a product or service, or the sum of the value that customers exchange for the benefits of having or using the product or service.