If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will

ACCOUNTING

Multiple Choice

Konrade’s Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:



Direct materials $ 40,000

Direct labor 10,000

Variable overhead costs 30,000

Fixed overhead costs 20,000

Total costs $100,000



It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade’s Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.


If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will

a. increase by $2,000.

b. increase by $80,000.

c. decrease by $3,000.

d. decrease by $85,000.


Click here for the SOLUTION