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CM Company manufactures a component used in the production of one of its main products. The following cost information is available:

Direct materials   $420
Direct labor (variable)   110
Variable manufacturing overhead   80
Fixed manufacturing overhead   30

A supplier has offered to sell the component to CM for $650 per unit. If CM buys the component from the supplier, the released facilities can be used to manufacture a product that would generate a contribution margin of $10,000 annually. Assuming that CM needs 4,000 components annually and that the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if CM outsources?
A) Operating income would increase by $10,000.
B) Operating income would decrease by $10,000.
C) Operating income would decrease by $150,000.
D) Operating income would increase by $160,000.
Textbook 
Horngren's Financial & Managerial Accounting, The Financial Chapters

Horngren's Financial & Managerial Accounting, The Financial Chapters


Edition: 5th
Authors:
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#2
8 years ago
Makes perfect sense, thx
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