Answer:
If the company decides to purchase the component from the outside supplier, its operating income will decrease by $66,000 per year. Therefore, Alanco should keep producing the component.
Explanation:
cost of producing the component (per unit):
direct materials $4
direct labor $6
variable manufacturing overhead $2
fixed manufacturing overhead, traceable $5 (non avoidable $1.50)
fixed manufacturing overhead, not traceable $8
total cost per unit = $25
units per year = 12,000
price offered by supplier $21 per unit
alternative A alternative B differential
keep producing buy amount
purchase cost $0 $252,000 ($252,000)
avoidable man.
costs $186,000 $0 $186,000
total $186,000 $252,000 ($66,000)
if the company decides to purchase the component from the outside supplier, its operating income will decrease by $66,000 per year.
