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Danny Zuko is the manager of an automobile parts manufacturer located in Rydell, California. Currently, two components used in the production of its T-Birds product are made in house. The annual production requirement for Sonny is 8,000 units and for Doody is 11,000 units, which resulted in the following production cost information for each component:

	Sonny	Doody
Direct material per unit	$6.75	$11.25
Direct labor per unit	12.00	13.50
Variable MOH per unit	6.00	6.75
Fixed MOH per unit	11.25	13.50
Total product cost per unit	$36.00	$45.00

Recently, Danny decided to devote additional machine time to other product lines, leaving limited machine hours available for the production of the components. An outside company has been identified that is willing to provide components of equal quality at a per unit price of $33.75 for Sonny and $40.50 for Doody. Outsourcing production of the components will decrease annual fixed costs by $132,000. Additionally, the contribution margin earned on using the freed up machine time for the other product lines will be $67,000. What is the impact of outsourcing on the company's operating income assuming no change in the production requirement for either component?

A.

increase of $2,500

B.

decrease of $39,000

C.

increase of $28,000

D.

decrease of $64,500

E.

increase of $67,500

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