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

question 47

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:

Credit Instrument

The evidence of indebtedness.

Promissory Note

A promissory note is a financial instrument in which one party promises in writing to pay a determinate sum of money to another, either at a fixed or determinable future time or on demand of the payee.

Time Draft

A type of credit instrument in international trade where payment is deferred for a specified period after the buyer accepts the draft.

Banker's Acceptance

A short-term financial instrument issued by a company but guaranteed by a bank, commonly used in international trade.