The Rodgers Company Makes 27,000 Units of a Certain Component

question 127

Multiple Choice

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier.
-Assume that if the component is purchased from the outside supplier,$35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year.If Rodgers chooses to buy the component from the outside supplier under these circumstances,then the impact on annual net operating income due to accepting the offer would be:

• A)$18,900 decrease
• B)$18,900 increase
• C)$21,400 decrease
• D)$21,400 increase

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