Harris Company Uses 5,000 Units of Part AA1 Each Year

Multiple Choice

Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part AA1 at this volume is as follows: $\begin{array}{lr}\text { Direct materials } & £ 10.00 \\\text { Direct labour } & 14.00 \\\text { Variable overhead } & 6.00 \\\text { Fixed overhead } & 4.00 \\\text { Total } & £ 34.00\end{array}$ An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost of £31.00. If Harris Company accepts this offer, it can eliminate 50 per cent of the fixed costs assigned to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to another company for £24,000 per year. If Harris Company accepts the offer of the outside supplier, annual profits will

A) increase by £29,000.
B) increase by £14,500.
C) increase by £22,000.
D) increase by £2,500.