Question

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate Number of parts produced annually Fixed costs Variable costs Total cost to produce 26,000 $43,000 $70,000 $113,000 Jackson Corporation can purchase the part from an outside supplier for $4.62 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the part, how much will its operating income be?
a. $28,620 greater than if the company bought the part
b. $141,620 greater than if the company bought the part
c. $21,500 greater than if the company bought the part
d. $71,620 greater than if the company bought the part

Answer 1

Answer:

A) $28620 greater than if the company bought the part

Explanation:

The cost to produce the parts for Jackson Corporation amounts to $117000 for 26000 produced. The variable cost per unit is only 70000/26000 = $2.69 / unit.

On the other hand, purchasing from the outside supplier would cost $4.62 per unit along with $21500 in fixed costs. (43000 / 2 =21500)

Thus, it will cost $141620 (21500 + 4.62*26000) to purchase 26000 units from outside.

The benfit of producing these units by Jackson corporation is 141620 - 113000 = $28620.