Part SOO is used in one of Morsey Corporation\'s products. The company makes 6,0
ID: 2482486 • Letter: P
Question
Part SOO is used in one of Morsey Corporation's products. The company makes 6,000 units of this part each year. The company's Accounting Department reports the following costs of producing the t this level of activity: An outside supplier has offered to produce this nd sell it to the company for $16.10 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 $6,000 of these allocated general overhead costs would be avoided. If management decides to buy part SOO from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?Explanation / Answer
Incremental savings :
Per unit= 1.4+2.4+7.2+3.6 = 14.6
Total incremntal savings = [14.6 *6000] + 6000 = 87600+6000 =$ 93600
Incremental cost = 6000 *16.1 = $ 96600
Overall company income will be reduced /decrease by 96600 - 93600 = 3000 (loss) if purchased from outside supplier .