Part A42 is used by Elgin Corporation to make one of its products. A total of 20
ID: 2536309 • Letter: P
Question
Part A42 is used by Elgin Corporation to make one of its products. A total of 20,500 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make the part and sell it to the company for $34.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part A42 could be used to make more of one of the company's other products, generating an additional segment margin of $27,500 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?
Net operating income would decrease by $204,150 per year.
Net operating income would increase by $27,500 per year.
Net operating income would decrease by $256,250 per year.
Net operating income would decrease by $31,950 per year.
Part A42 is used by Elgin Corporation to make one of its products. A total of 20,500 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
Explanation / Answer
Differential cost :
Impact = 665050-697000 = -31950
so answer is d) Net operating income would decrease by $31,950 per year
Make Buy Direct material 172200 Direct labour 200900 Variable manufacturing overhead 131200 Supervisor salary 133250 Opportunity cost 27500 Purchase cost 697000 Total relevant cost 665050 697000