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Knaack Corporation Is Presently Making Part R20 That Is Used

question 70

Multiple Choice

Knaack Corporation is presently making part R20 that is used in one of its products. A total of 18,000 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 produce and sell the part to the company for $27.70 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, none of which would be avoided if the part were purchased instead of produced internally.
-In addition to the facts given above,assume that the space used to produce part R20 could be used to make more of one of the company's other products,generating an additional segment margin of $27,000 per year for that product.What would be the impact on the company's overall net operating income of buying part R20 from the outside supplier and using the freed space to make more of the other product?

Definitions:

Debit

An accounting entry that results in either an increase in assets or a decrease in liabilities or equity on a company's balance sheet.

Credit

A bookkeeping record that enhances a liability or equity balance, or diminishes an asset or expenditure balance.

Debits

An accounting entry that increases an asset or expense account, or decreases a liability or equity account, recorded on the left side of the ledger.

Credits

Credits are accounting entries that increase liabilities or equity accounts, or decrease asset or expense accounts.