A specialized part is used in one of our company\'s most popular products. We kn

Question

A specialized part is used in one of our company's most popular products. We know the following costs of producing the 16,100 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $29.00 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 $22,100 of these allocated general overhead costs would be avoided. Prepare a report that shows the effect on the company's total net operating income of buying the part from a supplier rather than continuing to make it inside the company. Should we make or buy the part? Why?

Explanation / Answer

DM 3 DL 4 Variable oveheads 6.8 Supervisor salary 7.3 Total cost 21.1 Buying price 29 difference 7.9 units 16100 Cost       127,190 Saving in allocated expenses      22,100.0 Extra Cost to Buying    105,090.0 a net income would reduce by $105,090 b the part should be made , as the cost of making is less than cost of buying

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