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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:

  1. Increase by $16,000.
  2. Increase by $36,000.
  3. Decrease by $20,000.
  4. Decrease by $24,000.

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