CM Company manufactures a component used in the production of one of its main products

The following cost information is available:

Direct materials $420
Direct labor (variable) 110
Variable manufacturing overhead 80
Fixed manufacturing overhead 30

A supplier has offered to sell the component to CM for $650 per unit. If CM buys the component from the supplier, the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually. Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if CM outsources?
A) Operating income would decrease by $150,000.
B) Operating income would increase by $10,000.
C) Operating income would decrease by $10,000.
D) Operating income would increase by $160,000.

A .A)
Direct materials $420
Direct labor (variable) 110
Variable manufacturing overhead 80
Total variable manufacturing cost $610
Cost per unit if outsourced 650
Loss per unit if outsourced $40
Annual requirement units x 4,000
Total loss if outsourced (4,000 x $40 ) $160,000
Annual savings in fixed cost 10,000
Net loss on outsourcing $(150,000 )