Libbee Corporation Is Presently Making Part I50 That Is Used

question 18

Multiple Choice

Libbee Corporation is presently making part I50 that is used in one of its products. A total of 8,000 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 $24.50 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.
-If management decides to buy part I50 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 $6,400 per year.
• B) Net operating income would decline by $32,800 per year.
• C) Net operating income would increase by $32,800 per year.
• D) Net operating income would increase by $6,400 per year.

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Definitions:

True Beta

The measure of a stock's volatility and systematic risk in comparison to the overall market, considering the actual observed market movements.

Security-market Line

A graphical representation that shows the expected rate of return of an investment as a function of its beta, or systematic risk, relative to the market as a whole.

Capital-market Line

A line in the capital market theory that depicts the risk-return trade-off for efficient portfolios, showing that higher risk leads to higher expected return.

Market Expected Rate

The rate of return that investors anticipate from an investment, taking into account all known risks and future expectations.