59 ABC Company produces 1000 parts per year for use in its o

59. ABC Company produces 1,000 parts per year for use in its own finished goods. The variable product cost of these parts is $15 per unit. The fixed manufacturing overhead of the product is $12,000. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The part can be purchased from an outside supplier at $20 per unit. The annual impact on the company\'s net operating income as a result of buying the part from the outside supplier would be: A. $3,000 decrease B. $1,000 increase C. $5,000 increase D. $3,000 increase

Solution

Answer D. 3000 increase is correct, just see how it happens

Savings in Fixed manufacturing cost = 120000x2/3

   = 8000

Less: Excess variable cost    = (20-15) x 1000

   = 5000

Net savings    = 3000