Perrys Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many...
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Accounting
Perrys Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many of the company's products, and also sold directly to retailers for $38 per unit. At the current level of production, the cost per unit to produce TushSeat consists of:
Direct materials
$ 9
Direct labor
$ 7
Variable overhead
$ 6
Fixed overhead
$ 3
It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers. Assume that seats can be purchased from the outside supplier at $25 each, and that 60% of total fixed costs incurred in producing TushSeat will be eliminated by this strategy. Buying the seats instead of manufacturing them would cause Perry's operating income to:
Increase by $16,000.
Increase by $36,000.
Decrease by $20,000.
Decrease by $24,000.
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