Part U67 is used in one of Broce Corporation\'s products. The company\'s Account

Question

Part U67 is used in one of Broce Corporation's 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.

Required:

a. Prepare a report that shows the financial impact of buying part U67 from the supplier rather than continuing to make it inside the company.

Direct Material

b. Which alternative should the company choose? The total cost of the make alternative is (higher or lower) by ??? Therefore, the company should buy or make the part?

Per Unit Direct materials $ 2.90 Direct labor $ 3.90 Variable overhead $ 6.70 Supervisor's salary $ 7.20 Depreciation of special equipment $ 8.30 Allocated general overhead $ 5.40

Explanation / Answer

Make Buy Direct materials (16000*2.90) 46400 Direct labor (16000*3.90) 62400 variable overhead (16000*6.70) 107200 Spervisorys salary (16000*7.20) 115200 Depreciation of special Equipment 0 Allocated general overhead(avoidable only) 22,000 outside purchase price (16000*28) 448000 total cost 353200 448000 the company should continue making .the total cost of making is lower by 94,800 therefore the company should make the part

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