CM Company manufactures a component used in the production of one of its main pr
ID: 2592789 • Letter: C
Question
CM Company manufactures a component used in the production of one of its main products. The following cost information is available: Direct materials Direct labor (variable) Variable manufacturing $410 100 overhead 90 Fixed manufacturing overhead 35 A supplier has offered to sell the component to CM for $630 per unit. If CM buys the component from the supplier,the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually. Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if CM outsources? Select one: A. Operating income would increase by $10,000. B. Operating income would increase by $120,000. C. Operating income would decrease by $110,000. © D. Operating income would decrease by $10,000.Explanation / Answer
Answer C. Operating Income would decrease by $110,000 Statement of Incremental Profit IF Component is Purchased from Supplier Incremental Revenue Savings in Direct Material - 4,000 Nos X $410 1,640,000 Savings in Direct Labor - 4,000 Nos X $100 400,000 Savings in Variable MOH - 4,000 Nos X $90 360,000 Contribution Margin from production of another Product 10,000 2,410,000 Incremental Costs Purchase Cost of Component - 4,000 Nos X $630 2,520,000 Net Incremental Profit (Loss) (110,000)