Reference no: EM132610281

The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:

Direct Materials $4.20

Direct Labour $12

Variable Manufacturing Overhead $5.80

Fixed Manufacturing Overhead $6.50

Rodgers has received an offer from an outside supplier that is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labour is a variable cost.

Problem 1: Assume that if the components were to be purchased from the outside supplier, $35,100 of annual fixed manufacturing overhead would be avoided, and the facilities now being used to make the component would be rented to another company for $64,800 per year. If Rodgers chooses to buy the component from the outside supplier under these circumstances, what would be the impact on annual operating income due to accepting the offer?

A) $21,400 increase.

B) $18,900 increase.

C) $21,400 decrease.

D) $18,900 decrease.