6. rr Please show work and explanation. Part SOO is used in one of Morsey Corpor
ID: 2501191 • Letter: 6
Question
6. rr
Please show work and explanation.
Part SOO is used in one of Morsey Corporation's products. The company makes 6,000 units of this part each 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 this part and sell it to the company for $16.10 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 $6,000 of these allocated general overhead costs would be avoided. If management decides to buy part SOO 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
Calculation of Savings in expenses if Part is purchased
Variable cost (11x6000) 66000
Super visor's salary(3.60x6000) 21600
Allocated overhead 6000
Total savings 93600
Cost to be incurred for purchase 6000x16.10 = 96600
Additional cost = 96600-93600 = 3000
Net operating income will decrease if company purchases the part from outsider supplier.
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