Fillip Corporation makes 5,700 units of part U13 each year. This part is used in

Question

Fillip Corporation makes 5,700 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: Per Unit Direct materials $9.60 Direct labor $7.80 Variable manufacturing overhead $10.20 Supervisor's salary $5.90 Depreciation of special equipment $8.80 Allocated general overhead $8.00 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 $3,850 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 $14,700 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?

Explanation / Answer

No. Of units 5700 Particular Per unit cost $ Saving cost Direct material 9.6 Direct labour 7.8 Variable Manufacturing overhed 10.2 Supervisor salary 5.9 Total variable Cost 33.5 Variable cost for 5700 units 190950 Less: depreciation as asset have no alternative use Depreciation for 5700 units as asset has no alternative use -50160 Fixed cost avoided 3850 Additional segment margin 14700 Total Saving B 159340 Buy @25.1 A 143070 Net Saving B-A 16270 Net operating income of the company will increase by $16270

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