Part A42 is used by Elgin Corporation to make one of its products. A total of 17

Question

Part A42 is used by Elgin Corporation to make one of its products. A total of 17,000 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: Direct materials Direct labor Variable manufacturing overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Per Unit $770 $9.10 $5.70 $5.80 $8.20 $5.50 An outside supplier has offered to make the part and sell it to the company for $31.20 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 $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 trom the outside supplier

Explanation / Answer

Make Buy Per unit 17000 units Per unit 17000 units Direct materials 7.7 130900 Direct labor 9.1 154700 Variable manufacturing overhead 5.7 96900 Supervisory salary 5.8 98600 Purchase cost 31.2 530400 Opportunity cost 24000 Total cost 505100 530400 Company's income decrease by $25300(530400-505100) if bought from outside supplier

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