Part O43 is used in one of Scheetz Corporation\'s products. The company\'s Accou
ID: 2489900 • Letter: P
Question
Part O43 is used in one of Scheetz Corporation's products. The company's Accounting Department reports the following costs of producing the 16,300 units of the part that are needed every year. Per Unit Direct materials $3.50 Direct labor $4.20 Variable overhead $7.20 Supervisor's salary $7.90 Depreciation of special equipment $8.50 Allocated general overhead $5.50 An outside supplier has offered to make the part and sell it to the company for $31.00 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 $22,300 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part O43 from the supplier rather than continuing to make it inside the company. (Input the amount as a positive value. Omit the "$" sign in your response.) Net operating income would be by $ . b. Which alternative should the company choose? Make Buy
Explanation / Answer
a.
Units
Make
Buy
Per unit
Total
Per Unit
Total
Purchase price
$31.00
$505,300
Direct materials
16,300
$ 3.50
$ 57,050
Direct labor
16,300
$ 4.20
$ 68,460
Variable overhead
16,300
$ 7.20
$ 117,360
Supervisor's salary
16,300
$ 7.90
$ 128,770
Allocated general overhead
$22,300
Total costs
$393,940
$505,300
Depreciation and unavoidable allocated general overhead are ignored because they shall be incurred even in case the part is bought from outside. Hence, depreciation and unavoidable general overhead costs are irrelevant.
b.
The company should make the part itself.
Units
Make
Buy
Per unit
Total
Per Unit
Total
Purchase price
$31.00
$505,300
Direct materials
16,300
$ 3.50
$ 57,050
Direct labor
16,300
$ 4.20
$ 68,460
Variable overhead
16,300
$ 7.20
$ 117,360
Supervisor's salary
16,300
$ 7.90
$ 128,770
Allocated general overhead
$22,300
Total costs
$393,940
$505,300