Question

Aircraft Products, a manufacturer of aircraft landing gear, makes 1,400 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $74 and fixed costs of $65. The valves could be purchased from an outside supplier at $81 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:

Increase by $44,800.

Increase by $26,600.

Decrease by $26,600.

Decrease by $44,800.

Answer 1

Correct Answer ---Increase by $26600.00

Calculation of Total Cost
Alternative 1-Making Valve
Variable cost	(74*1400)	$ 103,600.00
Total Manufacturing Cost		$ 103,600.00

Calculation of Total Cost
Alternative 2- Buying Value from Outside
Purchase Price	(81*1400)	$ 113,400.00
Less: Benefit Achieved on buying from outside (saving in Fixed cost)	(65*1400)*40%	$    36,400.00
Total Cost of Buying		$    77,000.00

Calculation of Increase in Income
Total Manufacturing Cost	$ 103,600.00
Total Cost of Buying	$    77,000.00
Additional Benefit/ Increase in Income	$    26,600.00

Buying the valves from the outside supplier instead of making them would cause the company's operating income to:
Increase by $26600