Reference no: EM132810016

Our company manufactures a component used in the production of its products. Our costs to manufacture the part include

direct materials, $25 per unit;
direct labor, $20 per unit;
variable factory overhead, $15 per unit; and
fixed manufacturing overhead, $12 per unit.

problem 1: A supplier has offered to sell us the part for $65 per unit. If our company chooses to outsource, the fixed costs could be reduced by 55%. We would have no other use for the facilities currently employed in making the component. What would be the effect if our company decides to outsource?

a. The effect on operating income is $0.

b. We would save $1.60 per unit.

c. Costs would increase by $1.60 per unit.

d. We would save $0.40 per unit.