Question

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40:

Number of parts produced annually	23,000
Fixed costs	$43,000
Variable costs	$71,000
Total cost to produce	$114,000

Jackson Corporation can purchase the part from an outside supplier for $4.67 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2500 profit. If Jackson Corporation makes the part, what will its operating income be?

		$17,410 greater than if the company bought the part
		$126,410 greater than if the company bought the part
		$12,410 less than if the company bought the part
		$12,410 greater than if the company bought the part

Answer 1

Relevant Cost If He Buy The Part
Purchase cost			107410
(23000 Units*$4.67)
Saving In Fixed Cost			-21500
(50% of 43000)
Saving In Variable Cost			-71000
Additional Profit From Space			-2500
Net Additional Cost			12410
Therefore ,
Operating income would be
$12,410 less than if the company bought the part
Third option is correct