Question 7 Rebelo Corporation is presently making part E07 that is used in one o

Question

Question 7

Rebelo Corporation is presently making part E07 that is used in one of its products. A total of 17,000 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 make and sell the part to the company for $20.80 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 E07 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?

($6,800)

($163,200)

$163,200

$6,800

Per Unit Direct materials $ 3.80 Direct labor $ 3.80 Variable manufacturing overhead $ 1.10 Supervisor's salary $ 2.50 Depreciation of special equipment $ 1.40 Allocated general overhead $ 8.60

Explanation / Answer

Per unit 17000 units Make Buy Make Buy Direct materials 3.8 64600 Direct labor 3.8 64600 Variable manufacturing overhead 1.1 18700 Supervisor's salary 2.5 42500 Purchase cost 20.8 353600 Total 190400 353600 Impact on the company's overall net operating income = -163200(353600-190400) Option 2 is correct

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