Part TOO is used in one of Able Corporation\'s products. The company makes 6,000
ID: 2483285 • Letter: P
Question
Part TOO is used in one of Able 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 TOO 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
Cost of Manufacturing Part T100 in factory Per unit 6000 Units Direct Material 1.40 8400 Direct Labor 2.40 14400 Variable Manufacturing overhead 7.20 43200 Supervisor Salary 3.60 21600 Depreciation of special equipment 8.90 53400 Allocated general overheads 4.50 27000 Total Cost of manufacturing 28.00 168000 Avoidable costs if part T100 is purchased from market Per unit Direct Material 1.40 Direct Labor 2.40 Variable Manufacturing overhead 7.20 Supervisor Salary 3.60 Reduction in allocated general overheads 6000.00 Cost to company if Part t100 is purchased from supplier per unit Purchase cost 16.10 96600 Depreciation of special equipment 8.90 53400 Allocated general overheads 21000 ( 27000 - 6000 avaoidable overheads) Total cost if purchased from supplier 171000 Net Reduction in profit 3000 171000 - 168000 There will be reduction in profit by $ 3000 as cost of purchasing part t100 is 3000 more then cost of manufacturing in house thereby, overall net operating income will fall by 3000 annualy