Part P40 is a part used in the production of air conditioners at Jackson Corpora
ID: 2463695 • Letter: P
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:
Jackson Corporation can purchase the part from an outside supplier for $4.25 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 $2,000 profit. If Jackson Corporation makes the part, what will its operating income be?
Select one:
a. $5,500 less than if the company bought the part
b. $5,500 greater than if the company bought the part
c. 9,500 greater than if the company bought the part
d. $111,500 greater than if the company bought the part
Explanation / Answer
If Produce
if Purchase
Number of parts
22,000
22,000
Variable costs
66,000
93,500
Fixed Costs
40,000
20,000
Total cost
106,000
113,500
Cost Benefit if bough the part = $7,500
Operating income is greater $7,500 if bought the part
Add: Additional margin = $2,000 profit
Operating Income will be $9,500 greater than if the company bought the part
If Produce
if Purchase
Number of parts
22,000
22,000
Variable costs
66,000
93,500
Fixed Costs
40,000
20,000
Total cost
106,000
113,500