Ramon Corporation Makes 18,000 Units of Part E44 Each Year

question 163

Multiple Choice

Ramon Corporation makes 18,000 units of part E44 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 $23.30 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 $5,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part E44 would be used to make more of one of the company's other products, generating an additional segment margin of $21,000 per year for that product. What would be the impact on the company's overall net operating income of buying part E44 from the outside supplier?

• A)Net operating income would increase by $21,000 per year.
• B)Net operating income would increase by $18,800 per year.
• C)Net operating income would decrease by $123,000 per year.
• D)Net operating income would decrease by $165,000 per year.

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Definitions:

Individual Differences

Refers to the distinct attributes, traits, or characteristics that distinguish one person from another.

Personality

Refers to individual differences in characteristic patterns of thinking, feeling, and behaving.

Integrative Processes

Cooperative tactics and strategies in negotiation or conflict resolution that aim at achieving mutually beneficial outcomes.

Decrease Trust

The process of losing confidence in someone or something, often due to actions considered dishonest or unreliable.