Crick Corporation Makes 11,000 Units of Part W28 Each Year

question 119

Multiple Choice

Crick Corporation makes 11,000 units of part W28 each year. This part is used in one of the company's products. 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 $25.50 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. If the outside supplier's offer were accepted, only $18,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part W28 would be used to make more of one of the company's other products, generating an additional segment margin of $12,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part W28 from the outside supplier?

• A) Net operating income would decline by $65,000 per year.
• B) Net operating income would increase by $5,800 per year.
• C) Net operating income would decline by $89,000 per year.
• D) Net operating income would increase by $12,000 per year.

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Definitions:

Corporate Demand

The total demand for products or services generated by businesses and corporations.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values.

Freight Railroad

A type of railroad designed for the transportation of cargo, as opposed to passengers, across distances.

Revenue Management Opportunities

Strategies and practices aimed at maximizing income potential, often through dynamic pricing based on demand.