Problem:
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