Hermenegildo Corporation is presently moking part P42 thers uned in one of its p
ID: 2587705 • Letter: H
Question
Hermenegildo Corporation is presently moking part P42 thers uned in one of its products A total of 10,000 units of this part are produced and used every year The company's Accounting Department reports the following costs of producing the part a this level of activey Per Unit Direct materials. Direct labor $4.20 $4.40 Supervisors salary Depreciation of special equipment Allocated general overhead.... $6.70 $3.10 $3.30 An outside supplier has offered to produce and sell the part to the company for $23.90 each I this offer is eccepted, the supervisor's salary and ell of the variable costs, indluding dlirect lebor can be avoided. The special the entire compeny. If the outside supplier's offer were accepted, only $4,000 of these all general overhead coss would be avoided decides to buy part P42 from the outside supplier rather than to continue making the part, what would be the annual impect on the company's overallnet operating income? O Net operating income would decline by $5,000 per year O Net operating income would decine by $59,000 per O Net operating income would decine by $51,000 per yer O Net operaing income would decline by $55,000 per yearExplanation / Answer
Calculate relevant cost :
If company accept outside supplier's offer then net operating income will decline bye $5000
so answer is a) net operating income would decline by $5000
Make Buy Direct material 42000 Direct labour 44000 Variable overhead 77000 supervisor's salary 67000 Fixed overhead 4000 Purchase cost 239000 Total relevant cost 234000 239000