Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40:
Number of parts produced annually 22,000
Fixed costs $40,000
Variable costs $66,000
Total cost to produce $106,000
Jackson Corporation can purchase the part from an outside supplier for $4.25 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation makes the part, how much will its operating income be?
A) $47,500 greater than if the company bought the part
B) $20,000 greater than if the company bought the part
C) $7,500 greater than if the company bought the part
D) $32,500 less than if the company bought the part
C
Explanation: C)
Purchase cost 22,000 × $4.25 = $93,500
Plus unavoidable fixed cost 40,000 × 50% 20,000
Total Cost to purchase 113,500
Less Cost to build 106,000
Add'l cost to buy the part 7,500