Kampmann Corporation Is Presently Making Part Z95 That Is Used

question 60

Multiple Choice

Kampmann Corporation is presently making part Z95 that is used in one of its products.A total of 5,000 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 and sell the part to the company for $24.10 each.If this offer is accepted,the supervisor's salary and all of the variable costs 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.If management decides to buy part Z95 from the outside supplier rather than to continue making the part,what would be the annual impact on the company's overall net operating income?

• A)Net operating income would decrease by $36,000 per year.
• B)Net operating income would decrease by $34,000 per year.
• C)Net operating income would increase by $34,000 per year.
• D)Net operating income would increase by $36,000 per year.

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Definitions:

Permanent Shortage

A sustained situation where the demand for a good or service persistently exceeds its supply, often due to fixed or limited quantities.

Price System

Mechanism that allocates resources, goods, and services based on supply and demand.

Price Ceilings

Price ceilings are regulatory measures that set a maximum price that can be charged for certain goods or services, with the goal of ensuring affordability.

Price Floors

Minimum prices set by the government for certain goods and services, aimed at preventing prices from dropping too low.