Masse Corporation uses part G18 in one of its products. The company\'s Accountin
ID: 2382337 • 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 16,200 units of the part that are needed every year.Per Unit
Direct materials $3.10
Direct labor $4.10
Variable overhead $6.90
Supervisor's salary $7.40
Depreciation of special equipment $8.50
Allocated general overhead $5.60
An outside supplier has offered to make the part and sell it to the company for $30.00 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 $22,200 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 $24,000 per year for that product.
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 and dtermine which alternative the company should choose.
Explanation / Answer
Dep is a sunk cost & is not relevant. It will be incurred. Var costs are related to making the product. If we are not making, these will not be incurred. Actual Saving if we buy the part will be :- 1. Supervisor Salary = $7.40*16200 = $119,880 2. Allocated General OH = $22,200 3. Addl Seg Margin = $24,000 ---------------------------------------- Total Savings = $166,080 .....(A) Cost of Buying part = 16200*$30 = $486,000 ...(B) So we see that by Buying the part, we are incurring extra exp of 486000-166080 = 319920 So it is Not advisable to buy the part