Meltzer Corporation Is Presently Making Part O13 That Is Used

question 107

Multiple Choice

Meltzer Corporation is presently making part O13 that is used in one of its products. A total of 3,000 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 $27.00 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 $3,000 of these allocated general overhead costs would be avoided.
-If management decides to buy part O13 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 decline by $23,100 per year.
• B)Net operating income would decline by $26,100 per year.
• C)Net operating income would decline by $20,100 per year.
• D)Net operating income would decline by $8,700 per year.

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Definitions:

Payables Turnover

A financial ratio that measures how quickly a company pays its suppliers by comparing net credit purchases with the average accounts payable over a period.

Cash Cycle

The period it takes for a company to convert its investments in inventory and other resources into cash flows from sales.

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a period, often used to assess the efficiency of inventory management.

Accounts Receivable Turnover

A measure of how efficiently a company collects its outstanding credit sales, calculated as sales divided by average accounts receivable.