Question

Clinton's Engine Company manufactures part AT168 used in several of its engine models. Monthly unit production costs for 1,000 units are as follows:

Direct materials	$ 40
Direct labor	10
Variable overhead costs	30
Fixed overhead costs	20
Total	$100

It is estimated that 10% of the fixed overhead costs assigned to AT168 will no longer be incurred if the company purchases AT168 from the outside supplier. Clinton's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.

If Clinton's Engine Company purchases 1,000 AT168 parts from the outside supplier per month, then its monthly operating income will

Group of answer choices

decrease by $3,000

decrease by $85,000

increase by $2,000

increase by $80,000

Answer 1

Answer:
Particulars	Make	Buy
Direct materials   - ( 1,000 x $ 40)	$ 40,000
Direct labor - ( 1,000 x $ 10)	$ 10,000
Variable overhead cost   - ( 1,000 x $ 30)	$ 30,000
Fixed overhead cost - ( 1,000 x $ 20)	$ 20,000	$ 18,000 ($ 20,000 (-) 10% )
Purchase Cost   - ( 1,000 Units x $ 85)	-	$ 85,000
Total cost	$ 100,000	$ 103,000
Difference in Costs     =   $ 100,000 (-) $ 103,000     =    ($ 3,000) Decrease
Option (a) is Correct Decrease by $ 3,000