Part O43 is used in one of Scheetz Corporation\'s products. The company\'s Accou
ID: 2500720 • 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 6,000 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 31 dollars each. If this offer is accepted, half of the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part can be put to use to make another product and earn a contribution margin of 70,000 dollars from selling the new product. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, none of the allocated general overhead costs would be avoided. Required: Prepare a report that shows the cost of making O43 vs the cost of buying it from outside, and determine which alternative the company should choose based on the monetary considerations.Explanation / Answer
Comparison of Scenarios (Unless otherwise specified, all values in $) Part Manufactured Part acquired from within factory outside supplier No. of units 6000 6000 Cost of acquiring part @ $ 31 per unit $ $ 186000 Direct Materials @ $8 per unit 48000 0 Direct Labour @ $9 per unit 54000 0 Variable Overhead @ $2 per unit 12000 0 Supervisors' Salary @ $4 per unit 24000 12000 Depreciation of Special Equipment @ $8 per unit 48000 0 Allocated General Overheads @ $7 unit 42000 42000 Contribution from Selling New Product -70000 Total Costs incurred (Net of Revenues) 228000 170000 Based on the monetary consideration, Scheetz Corporation should acquire part O43 from the outside supplier, since it results in a cost saving of $ 58,000, as compared to if the part was manufactured in-house.