CM Manufacturing Has Provided the Following Unit Costs Pertaining to a Component

CM Manufacturing has provided the following unit costs pertaining to a component they manufacture and use in the production of one of their main products:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 315 \\\hline \text { Direct labor (variable) } & 96 \\\hline \text { Variable manufacturing overhead } & 72 \\\hline \text { Fixed manufacturing overead } & 29 \\\hline\end{array}$$
A supplier has offered to provide the component to CM manufacturing for $500 per unit. If CM Manufacturing were to buy the component from the supplier, they could use the released facilities to manufacture a product which would generate contribution margin of $16,000 annually. Assuming that CM Manufacturing needs 2,000 components annually and the fixed manufacturing overhead is unavoidable, what would be the impact on operating income if the company outsources?

A) Operating income would go down by $18,000.
B) Operating income would go up by $2,000.
C) Operating income would go down by $12,000.
D) Operating income would go up by $4,000.

Correct Answer:

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