Hermenegildo Corporation Is Presently Making Part P42 That Is Used

question 17

Multiple Choice

Hermenegildo Corporation is presently making part P42 that is used in one of its products. A total of 10,000 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 $23.90 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 $4,000 of these allocated general overhead costs would be avoided.

-If management decides to buy part P42 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 $5,000 per year.
• B)Net operating income would decline by $59,000 per year.
• C)Net operating income would decline by $51,000 per year.
• D)Net operating income would decline by $55,000 per year.

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Definitions:

Real GDP

Represents the total economic output of a country, adjusted for inflation, measuring the value of all goods and services produced over a specific time period.

GDP

Gross Domestic Product, which measures the total value of all goods and services produced within a country's borders in a given time period, used as a broad indicator of economic health.

Price Level

Denotes the mean of present prices for all types of goods and services produced in the economy.

GDI

Gross Domestic Income, which measures a country's total income earned from its economic activities, including wages, profits, and taxes minus subsidies.