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:

Percent of Sales

Percent of sales is a financial analysis tool that helps in estimating how certain accounts, like revenue and expenses, will vary in proportion to changes in sales.

Bad Debts

Debts that are not recoverable and are written off as a loss by the business because they cannot be collected.

Journal Entries

Journal entries are the recordings of financial transactions in the books of accounts, serving as the primary input in the accounting system.

Doubtful Accounts

Accounts receivable considered unlikely to be collected, prompting businesses to create allowances for bad debts.