Our company manufactures a component used in the production of its products.

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.

A supplier has offered to sell us the part for $65 per unit. The fixed costs are unavoidable, and 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?

The effect on operating income is $0.

We would save $5 per unit.

Costs would increase by $5 per unit.

We would save $7 per unit.

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