Part A42 is used by Elgin Corporation to make one of its products. A total of 16
ID: 2461306 • Letter: P
Question
Part A42 is used by Elgin Corporation to make one of its products. A total of 16,500 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make the part and sell it to the company for $30.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part A42 could be used to make more of one of the company's other products, generating an additional segment margin of $23,500 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?
Net operating income would decrease by $24,350 per year.
Net operating income would decrease by $149,750 per year.
Net operating income would increase by $23,500 per year.
Net operating income would decrease by $193,050 per year.
©2016 McGraw-Hill Education. All rights reserved.
Part A42 is used by Elgin Corporation to make one of its products. A total of 16,500 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
Explanation / Answer
Elgin Corporation Depreciation of special equipment and allocated General OH are the costs that are not relevant as those are to be incurred in both the situations Units to be made/procured = 16,500 Relevant Cost Comparison Make Buy Details Per unit Total Per unit Total Direct Materials 7.60 125,400 Direct Labor 9.00 148,500 Variable Mfg OH 5.60 92,400 Supervisor's salary 5.70 94,050 External Prcurement cost 30.80 508,200 Additional segment margin from using space of A42 (23,500) Total cost 460,350 484,700 Incremental cost 24,350 So by buying the part from outside the net operating income of the company will reduce by $ 24,350