Ethridge Corporation Is Presently Making Part H25 That Is Used

question 50

Multiple Choice

Ethridge Corporation is presently making part H25 that is used in one of its products.A total of 9,000 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 $15.40 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 H25 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 increase by $24,300 per year.
• B)Net operating income would decline by $24,300 per year.
• C)Net operating income would increase by $58,500 per year.
• D)Net operating income would decline by $58,500 per year.

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Definitions:

Weighted-Average Method

A cost accounting method that averages the costs of all goods available for sale during the period, regardless of when they were acquired or produced.

First-In, First-Out Method

A method of inventory valuation where the oldest inventory items are recorded as sold first, with the most recent costs remaining in inventory.

Conversion Costs

The combination of labor and manufacturing overhead costs that are incurred in turning raw materials into finished products.

First-In, First-Out Method

An inventory valuation method where the first items produced or acquired are the first ones sold or used, affecting cost of goods sold and inventory valuation.