Ramon Corporation Makes 18,000 Units of Part E44 Each Year

question 85

Multiple Choice

Ramon Corporation makes 18,000 units of part E44 each year.This part is used in one of the company's products.The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for $23.30 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including direct labor,can be avoided.The special equipment used to make the part was purchased many years ago and has no salvage value or other use.The allocated general overhead represents fixed costs of the entire company.If the outside supplier's offer were accepted,only $5,000 of these allocated general overhead costs would be avoided.In addition,the space used to produce part E44 would be used to make more of one of the company's other products,generating an additional segment margin of $21,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?

• A)Net operating income would increase by $21,000 per year.
• B)Net operating income would increase by $18,800 per year.
• C)Net operating income would decrease by $123,000 per year.
• D)Net operating income would decrease by $165,000 per year.

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Definitions:

Long Run

The long run is a period in which all inputs and production technologies can be varied, with no fixed factors of production.

Long-Run

Pertains to a period in which all factors of production and costs are variable, allowing companies to adjust all inputs.

AVC

Average Variable Cost, the total variable cost divided by the number of units produced, reflecting costs that change with output.

Short-Run

A period during which at least one of a firm's inputs is fixed, limiting its ability to adjust to demand changes.