Reference no: EM13599907

Westerville Auto Co. produces a small part that it uses in the production of its automobiles. The company's unit product cost for the part based on the production is 70,000 parts per year, is as follows:

An outside supplier has offered to supply the parts to the company for only $13.00 per part. 60% of the traceable fixed manufacturing cost is supervisor salaries and other costs that can be eliminated if the parts are purchased. The other 40% of the traceable fixed manufacturing costs consist of depreciation and speical equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the spance being used to produce the parts would otherwise be idle.

Ignore the impact of income taxes in your calculation.

How much would profits increase or decrease as a result of purchaing the parts from the outside supplier rather than making them inside the company?

a) Increase net operating income by $25,000
b) Decrease net operating income by $25,000
c) Decrease net operating income by $7,000
d) Increase net operating income by $7,000