Reference no: EM132100414

Question - Alonzo Enterprises manufactures one of the components used to assemble its primary product. Specialty Parts has offered to sell Alonzo the component for $12.80 per unit. Alonzo currently produces 100,000 units of the component. The unit manufacturing cost is computed as follows:

DM per unit $5.00

DL per unit 6.00

Variable MOH per unit 1.75

Fixed MOH per unit 2.00

Manufacturing cost per unit $14.75

None of Alonzo's fixed costs will be eliminated if production of the component is outsourced. However, the freed up capacity could be used to build a different product, which is expected to generate $30,000 of contribution margin per year. Assume Alonzo still needs 100,000 units next year. What will happen to the company's operating income if production of the component is outsourced?

A. The company's operating income will increase.

B. The company's opeating income will decrease. If production of the component is outsourced, what the expected change in Alonzo's operating income?