Question & Answer: Can someone please show me how to solve the problem:…..

Can someone please show me how to solve the problem:

Part I51 is used in one of Pries Corporation’s products. The company makes 18,000 units of this part each year. The company’s Accounting Department reports the following costs of producing the part at this level of activity.

Per unit

Direct materials                                                                             1.20

Direct labor                                                                                     2.20

Variable manufacturing overhead                                           3.30

Supervisor’s salary                                                                        1.00

Depreciation of special equipment                                          2.70

Allocated general overhead                                                       8.50

An outside supplier has offered to produce this part and sell it to the company for 15.80 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only 26,000 of these allocated general overhead costs would be avoided.

If management decides to buy part I51 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?