Fillip Corporation makes 4,700 units of part U13 each year. This part is used in
ID: 2380824 • Letter: F
Question
Fillip Corporation makes 4,700 units of part U13 each year. This part is used in one of the company's products. 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 and sell the part to the company for $25.10 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 $3,350 of these allocated general overhead costs would be avoided. In addition, the space used to produce part U13 would be used to make more of one of the company's other products, generating an additional segment margin of $13,700 per year for that product.
What would be the impact on the company's overall net operating income of buying part U13 from the outside supplier?
A. Net operating income would increase by $18,930 per year.
B. Net operating income would increase by $13,700 per year.
C. Net operating income would decline by $101,520 per year
D. Net operating income would decline by $62,980 per year.
Please show calculations
Per Unit Direct materials $7.60 Direct labor $5.80 Variable manufacturing overhead $8.20 Supervisor's salary $3.90 Depreciation of special equipment $8.60 Allocated general overhead $7.00Explanation / Answer
ANSWER: A. Net operating income would increase by $18,930 per year.
7.60 + 5.80 + 8.20 + 3.90 = $25.50 (costs eliminated per unit) * 4700 units = $119,850 avoided (from variable and supervisor costs)
+$3,350 avoided (from allocated general costs)
= $123,200 total costs avoided = INCREASE in net income
+ $13,700 (profit from using space for another product = INCREASE in net income
= $136,900 TOTAL INCREASE TO NET INCOME
- $117,970 ($25.10 * 4700 units = cost to buy U13) DECREASE TO NET INCOME
= $18,930
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