Masse Corporation uses part G18 in one of its product. The company?s Accounting
ID: 2446871 • Letter: M
Question
Masse Corporation uses part G18 in one of its product. The company?s Accounting Department reports the following cost of producing the 16,000 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 $28.00 each. If this offer is accepted, the supervisors 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 $22,000 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 companys's other products, generating an additional segment margin of $22,000 per year for that product. 1) Prepare a report that shows the effect on the company?s total net operating income of buying part G18 the supplier rather than continuing to make it inside the company. 2) Which alternative should the company choose? SHOW WORKExplanation / Answer
Cost of 16000 units to company is taken from supplier (16000 units x $28) = $4,48,000
Cost of manufacturing 16000 units of G18 product will be as follow;
Direct material $46400
Add: Direct labor $62400
Add: Variable overhead $107200
Add: Supervisor salary $115200
Add: Depreciation on equipment $132800
Add: Allocated general overhead $22000
Add: Margin of other segment $22000
Total cost of G18 product = $508000
(1) Net effect on company’s net operating income if G18 product is bought from supplier =
$508000 – $448000) = $60000
(2) Company should buy this product G18 from supplier because company net operating income will be increased by $60000.