Rama Corporation Is Presently Making Part J56 That Is Used

question 141

Multiple Choice

Rama Corporation is presently making part J56 that is used in one of its products. A total of 4,000 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 $30.80 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 J56 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 $44,000 per year.
• B)Net operating income would increase by $10,000 per year.
• C)Net operating income would decline by $10,000 per year.
• D)Net operating income would decline by $44,000 per year.

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Definitions:

Round Lot

A standardized number of units of an asset or security, usually used as the normal trading unit in the stock market.

Clientele

Refers to the base of customers or clients who regularly do business with an establishment or who are served by an organization, professional, or agency.

Compromise Dividend Policy

An approach to dividend disbursement that attempts to balance the interests of shareholders preferring regular dividends with those favoring reinvestment of profits.

Positive Net Present Value

Indicates that the present value of future cash flows from an investment exceeds the initial investment cost, suggesting profitability.