Part A42 is used by Elgin Corporation to make one of its products. A total of 18
ID: 2468757 • Letter: P
Question
Part A42 is used by Elgin Corporation to make one of its products. A total of 18,500 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 $32.40 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 $25,500 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?
A.Net operating income would decrease by $176,150 per year.
B.Net operating income would increase by $25,500 per year.
C.Net operating income would decrease by $223,850 per year.
D.Net operating income would decrease by $28,150 per year.
Part A42 is used by Elgin Corporation to make one of its products. A total of 18,500 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
Per Unit Cost that cannot be avoided = 8.50 + 5.80 = $14.30
Total Cost = $14.30 * 18,500 = $264,550
less: Additional Segment income = $25,500
Net cost $239,050
Total Purchase Value = 18500 * $32.40 = $599,400
Add: unavoidable cost = $239,050
Total Cost = $838,450
Total cost of Manufacturing = 18,500 * $43.80 = $810,300
Net operating income would decrease by $28,150 ($838,450 - $810,300)