Part A42 Is Used by Elgin Corporation to Make One

question 48

Multiple Choice

Part A42 is used by Elgin Corporation to make one of its products.A total of 16,000 units of this part are produced and used every year.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 the part and sell it to the company for $30.40 each.If this offer is accepted,the supervisor's salary and all of the variable costs,including the 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,none of which would be avoided if the part were purchased instead of produced internally.In addition,the space used to make part A42 could be used to make more of one of the company's other products,generating an additional segment margin of $23,000 per year for that product.What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?

• A)Net operating income would decrease by $23,400 per year.
• B)Net operating income would decrease by $143,400 per year.
• C)Net operating income would increase by $23,000 per year.
• D)Net operating income would decrease by $189,400 per year.

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Definitions:

Consumer Demand

The desire and willingness of consumers to purchase goods and services at various price points, driving the market dynamics for those goods and services.

Profitability

The ability of a company to generate earnings more than its expenses and costs, determining its financial success and viability.

Latent Need

A customer's unrecognised or subconscious need that has not yet been identified or addressed by companies.

Critical Needs

Fundamental requirements identified by customers that must be addressed by a product or service for it to be considered viable and satisfactory.