Purchase Solution

Production Purchase Decision - NEC Company

Not what you're looking for?

Ask Custom Question

NEC Company produces 8,000 part each year, which are used in the production of one of its products. The unit product cost of part is $36, computed as follows:

Variable Production Costs .......... $16
Fix Production Costs ............... 20
Unit Product Cost .................. $36

The parts can be purchased from an outside supplier for only $28 each. the space in which the parts are now produce would be idle and fixed production costs would be reduced by one-forth. If the parts are purchase from the outside supplier, the annual impact on the company's operating income will be:

a) $24,000 increase
b) $56,000 decrease
c) $56,000 increase
d) $24,000 decrease

Answer: b) $56,000 decrease (My selection)
Answer: c) $56,000 increase

Savings in fixed cost = $40,000 = 1/4 reduction * $ 20 per part * 8000 parts
Additional costs = $96,000 =($28 from outside supplier -$16 internal production cost) x 8000 parts

$96,000 - $ 40,000 = $56,000

I would like to know if this is a net increase or a net decrease in operating income. Please advice if am correct with my selection.

Thanks in advance

Purchase this Solution

Solution provided by:
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
Recent Feedback
  • "Your explanation to the answers were very helpful."
  • "What does 1 and 0 means in the repair column?"
  • "Went through all of the formulas, excellent work! This really helped me!"
  • "try others as well please"
  • "Thank you, this helped a lot. I was not sure how to plug in those numbers to a formula. This was a great help. Now I have to figure out how to explain cost of capital is used in net present value analysis, and how cost of capital is used in net present value analysis. This stuff gets confusing."
Purchase this Solution


Free BrainMass Quizzes
Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Motivation

This tests some key elements of major motivation theories.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.