Reference: 09-11
Rodgers Company Makes 27,000 Units of a Certain

Multiple Choice

Reference: 09-11
Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows: $$\begin{array} { | l | l | } \hline \text { Direct materials } & \$ 4.20 \\\hline \text { Direct labour } & \$ 12.00 \\\hline \text { Variable manufacturing overhead } & \$ 5.80 \\\hline \text { Fixed manufacturing overhead } & \$ 6.50 \\\hline\end{array}$$ Rogers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost.
-Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year. If Rogers chooses to buy the component from the outside supplier under these circumstances, then the impact on annual net operating income due to accepting the offer would be:

A) $21,400 increase.
B) $18,900 increase.
C) $21,400 decrease.
D) $18,900 decrease.