Masse Corporation uses part G18 in one of its products. The company\'s Accountin
ID: 2477269 • Letter: M
Question
Masse Corporation uses part G18 in one of its products. The company's Accounting Department reports the following costs of producing the 16,100 units of the part that are needed every year. Per Unit Direct materials $3.00 Direct labor $4.00 Variable overhead $6.80 Supervisor's salary $7.30 Depreciation of special equipment $8.40 Allocated general overhead $5.50 An outside supplier has offered to make the part and sell it to the company for $29.00 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 $22,100 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 company's other products, generating an additional segment margin of $23,000 per year for that product. Required: a. Calculate the effect on the company's total net operating income of buying part G18 from the supplier rather than continuing to make it inside the company. (Input the amount as a positive value. Omit the "$" sign in your response.) Net operating income would be by $ . b. Which alternative should the company choose?
Explanation / Answer
Answer: a)
Decrease in Net income =691590 - 563500 = $128090
Company's total net operating income will decrease by $128090 if it purchases the part G18 from the supplier rather than making it in inside the company.
Working note for Buying scenario:
Allocated general overhead = 5.50 - (22100/16100)
Additional segment margin = 23000/16100
Answer: b)
The company should make the part G18 inside the company as its cost per unit is less than the purchase price.
Description Make Buy Purchase price $ - $ 29.00 Direct material $ 3.00 $ - Direct labor $ 4.00 $ - Variable overhead $ 6.80 $ - Supervisor's salary $ 7.30 $ - Depreciation of special equipmet $ 8.40 $ 8.40 Allocated general overhead $ 5.50 $ 4.13 Additional segment margin $ - $ 1.43 Units produced 16100 16100 Total cost per unit $ 35.00 $ 42.96 Total cost $ 5,63,500.00 $ 6,91,590.00