2) Part U67 is used in one products. The tollowing costs of producing the 7,000

ID: 2532532 • Letter: 2

Question

2) Part U67 is used in one products. The tollowing costs of producing the 7,000 units of the part that are needed every year. or BrocCorporation's products. The company's Accounting Department reports the Direct materials Direct labor Variable overhead Supervisor's salary Depreciation of special equipment Allocated general overhead Per Unit $ 8.70 $ 2.70 S 3.30 1.90 $ 1.80 S 5.50 An outside supplier has offered to make the part and sell i o the company for $21.40 each. If this offer is acc epted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special uipment used to make the part was purchased many years ago and has no salvage value or other use. The d general overhead represents fixed costs of the entire company. If the outside supplier's offer were epted, only $6,000 of these allocated general overhead costs would be avoided. acc Required: are a report that shows the financial impact of buying part U67 from the supplier rather than continuing a. Prepare a report to make it inside the company b. Which alternative should the company choose?

Explanation / Answer

Solution:

Part a -- Financial Impact Report

Analysis to show the financial impact of buying part U67

Make

Buy

Net Income Increase (Decrease) from buying outside supplier over making

Direct materials per unit (7000*8.70)

$60,900

Direct labor per unit (7000*2.70)

$18,900

Variable Overhead Per Unit (7000*3.3)

$23,100

Supervisor's Salary (7000*1.90)

$13,300

Depreciation of special equipment (7000*1.8)

$12,600

Allocated general overhead

$38,500

(7000*5.50)

$32,500

(38,500 – 6000 avoidable)

$6,000

Price offered by outside supplier (7000*21.40)

$149,800

($149,800)

Net Effect

$167,300

$182,300

($15,000)

Part b – No, the company should not choose the alternative. Since company will have loss of $15,000 if purchase the product from outside supplier.