Part A42 is used by Elgin Corporation to make one of its products. A total of 23
ID: 2475061 • Letter: P
Question
Part A42 is used by Elgin Corporation to make one of its products. A total of 23,500 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 $36.40 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 $30,500 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 $37,650 per year.
Net operating income would decrease by $249,150 per year.
Net operating income would increase by $30,500 per year.
Net operating income would decrease by $307,850 per year.
Per Unit Direct materials $9.00 Direct labor $10.40 Variable manufacturing overhead $7.00 Supervisor's salary $7.10 Depreciation of special equipment $9.50 Allocated general overhead $6.80Explanation / Answer
Particulars
Direct materials
Avoidable
Direct labor
Avoidable
Variable manufacturing overhead
Avoidable
Supervisor's salary
Avoidable
Depreciation of special equipment
Unavaoidable
Allocated general overhead
Unavaoidable
Per Unit
A
Direct materials
$ 9.00
B
Direct labor
$ 10.40
C
Variable manufacturing overhead
$ 7.00
D
Supervisor's salary
$ 7.10
E
So saving per unit by purchasing from out side( A to D)
33.50
F
No of Units purchased from outside
23,500
G
Total saving( E x F)
787,250
Add:
H
Additional Contribution by using availabe space
30,500
I
Total Additional revenue(G + H)
817,750
Less
J
Amount spent to buy A42 from outside (23,500 units x 36.40)
855,400
K
Net increase/Decrease in Net operating income(I-J)
(37,650)
Hence Net operating income would decrease by $37,650 per year.
Particulars
Direct materials
Avoidable
Direct labor
Avoidable
Variable manufacturing overhead
Avoidable
Supervisor's salary
Avoidable
Depreciation of special equipment
Unavaoidable
Allocated general overhead
Unavaoidable