Masse Corporation uses part G18 in one of its products. The company\'s Accountin
ID: 2348908 • Letter: M
Question
Masse Corporation uses part G18 in one of its products. The company's Accounting Department reports the following costs of producing the 14,900 units of the part that are needed every year.
Per Unit
Direct materials $1.80
Direct labor $2.80
Variable overhead $5.60
Supervisor's salary $6.10
Depreciation of special equipment $7.20
Allocated general overhead $4.30
An outside supplier has offered to make the part and sell it to the company for $22.00 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 $20,900 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G18 could be used to make more of one of the company's other products, generating an additional segment margin of $23,000 per year for that product.
Required:
a.
Calculate the effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company. (Input the amount as a positive value. Omit the "$" sign in your response.)
Net operating income would be by $ .
b.
Which alternative should the company choose?
Make
Buy
Explanation / Answer
Present Cost (14,900 units) Per Unit Cost Total Cost Direct material 1.80 26,820 Direct Labor 2.80 41,720 Variable Overhead 5.60 83,440 Supervisor Salary 6.10 90,890 Depreciation on special eqipment 7.20 107,280 Allocated General Overhead 4.30 64,070 Total cost 27.80 414,220 ----------------------------------------------------------------------------------------------------- Projected Cost (14,900 units) Total Cost Per unit cost Cost to Vendor 327,800 22.00 Allocated General Overhead 43,170 2.90 Depreciation on special eqipment 107,280 7.20 Total cost 478,250 32 Less: Additional revenue 23,000 1.54 Net Cost 455,250 30.55 The per unit cost oresently is $27.80, whereas if proposal of outside vendor is accepted, it will be $30.55, which is $2.75 more. --------------------------------------------------------------------------------------------------- (b) The company has to decide about the depreciation of special equipment. The depreciation per unit is $7.20. This increase the per unit cost of buying the part from outstanding vendor. Therefore the company should not accept the proposal of outside vendor.