Meltzer Corporation is presently making part O13 that is used in one of its prod

Question

Meltzer Corporation is presently making part O13 that is used in one of its products. A total of 3,000 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 produce and sell the part to the company for $27.00 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 $3,000 of these allocated general overhead costs would be avoided. In addition to the facts given X#3 could be used to make more of one of the company's other products, generating an additional segment margin of $26,000 per year for that product. What would be the impact on the company's overall net operating income of buying part O13 from the outside supplier and using the freed space to make more of the other product

Explanation / Answer

Net operating income will increase by $ 17300 if purchased from outside suppliers.

**Depreciation will continue to charge as equipment has no alternative use

Saving in Cost due to purchase (2.1+4.8+8.6+7.6)=23.1*3000 69300 Saving in allocated overhead cost 3000 Increase in segment revenue 26000 lesS:Purchase cost   (27 *3000) (81000) Incremental Net operating income 17300

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