10:4 Rama Corporation is presently making part J56 that is used in one of its pr

Question

10:4

Rama Corporation is presently making part J56 that is used in one of its products. A total of 4,000 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: An outside supplier has offered to produce and sell the part to the company for $30.80 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, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part J56 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

Explanation / Answer

Solution:

Caluculate the Net Operating Income:

Net Operating Income

Particulars Amount Sales (4,000 * 30.80) 1,23,200 Less: Variable Cost Expencess Direct Materials (4,000,* 1.80) 7,200 Direct Labour (4,000 *7.80) 31,200 Variable Overhead (4,000 * 7.90) 31,600 Supervisory Salary (4,000 * 2.30) 9,200 Depreciation on Special Equipment (4,000 * 6.90) 27,600 Allocated general Onerhead (4,000 * 6.60) 26,400      Total Expencess    1,33,200    Net Operating Income $ 10,000

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