Masse Corporation uses part G18 in one of its products. The company\'s Accountin
ID: 2497732 • 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 16,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $28.00 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 $22,000 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 $22,000 per year for that product. Prepare a report that shows 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. (Make and Buy columns) Which alternative should the company choose?Explanation / Answer
Answer:
If the Company opts for buying the part G18 from outside supplier, then;
Saving in Direct Material Cost $ 46,400 (16,000 x $ 2.90)
Saving Direct Labor Cost $ 62,400
Saving in Variable Overheads $ 107,200
Saving Supervisor Salary $ 115,200
Saving in Fixed Overhead $ 22,000
Additional Income from facility usage $ 22,000
Total Savings / Benefits from opting buy option $ 375,200
And; Purchase cost from outside $ 28 x 16000 = $ 448,000
Gain / (Loss) due to purchase option ($ 72,800)
Since, by opting the Company will incure additional cash expenses of $ 72,800 therefore, the company should not go with the option of purchase of G18 from outside supplier.