Please Explain in details The ABC Company produces and uses

Please Explain in details

The ABC Company produces and uses a total of 8,100 units of C4 every year. ABC is presently making part C4 that is used in one of its products.The costing wizards at ABC report the following costs of producing the part at this level of activity:

One of ABC\'s suppliers has made an offer to make and sell the part to ABC at a price of $15.00 each. If ABC takes this offer, the cost wizards have determined that the supervisor\'s salary and all of the variable costs can be avoided. They also let you know that 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, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part C4 from Supplier Company rather than to continue making the part, what would be the annual impact on the company\'s overall net operating income?

Solution

calculate relevant cost :

Net operating income decrease by (121500-106110) = (15390)