Part O43 is used in one of Scheetz Corporation\'s products. The company\'s Accou
ID: 2431335 • Letter: P
Question
Part O43 is used in one of Scheetz Corporation's products. The company's Accounting Department reports the following costs of producing the 16,200 units of the part that are needed every year.
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.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company. (Input the amount as a positive value.)
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 $5.60Explanation / Answer
Differential Analysis Make Buy Net Income Inc/Decrease Direct Material 50220 0 50220 Direct Labouur 66420 0 66420 Variable overheads' 111780 0 111780 Supervisors salaries 119880 0 119880 Dep on Special Equipment 137700 137700 0 Allocated General Oh 90720 68520 22200 Cost of Purchase 0 486000 -486000 Net decrease in income 576720 692220 -115500 Hence, the Component must be manufactured.