Question
Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40:
Number of parts produced annually 26,000
Fixed cost $43,000
Variable cost 70,000
Total cost to produce 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?
Answer:
Change in operating income= $28,620
Explanation:
$
Total variable cost of making 70,000
Total cost of external purchase ($4.62×26,000) <u>120,120
</u>
Extra variable cost from external purchase 50,120
less Savings in fixed overheads(50%×43,000) <u>( 21,500) </u>
Change in operating income <u> 28,620 </u>
Note that the the balance of the fixed cost (50% of $43,000= 21500) were not included because they not relevant for the decision. They would be incurred either way.
Change in operating income= $28,620
