Part E43 is used in one of Ran Corporation\'s products. The company\'s Accountin

Question

Part E43 is used in one of Ran Corporation's products. The company's Accounting Department reports the following costs of producing the 20,000 units of the part that are needed every year.

Per

Unit

Direct materials $4.50

Direct labor 1.20

Variable overhead 2.70

Supervisor’s salary 3.00

Allocated general overhead 4.10

An outside supplier has offered to make the part and sell it to the Ran Corporation for $14.70 each. If the offer is accepted, the supervisor's salary and all of the variable costs can be avoided. The allocated general overhead represents fixed costs for the entire company. If the outside supplier's offer is accepted, only $15,000 of these allocated general overhead costs would be avoided.

Required:

a. Should Ran Corporation make the part internally or buy it externally? Justify your answer.

b. Would your answer change if you were able to rent the facility for $75,000 if the product was produced externally? Why?

Explanation / Answer

a)

a)Ran should make the part internally as buying from outside supplier result in loss of $51000

b)Yes ,it would then result in proft of $ 24000       [ 75000-51000]

Incremetal savings savings in per unit variable cost (11.4 *20000 ) 228000 savings in fixed cost 15000 less:Incrmental cost   (14.70 * 20000) (294000) Incremental profit /(loss) (51000) loss

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