11. Part A42 is used by Elgin Corporation to make one of its products. A total o
ID: 2599839 • Letter: 1
Question
11. Part A42 is used by Elgin Corporation to make one of its products. A total of 16,000 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 Per Unit Direct materials.. $7.50 Direct labor $8.90 Variable manufacturing overhead... $s.50 Supervisor's salary$5.60 Depreciation of special equipment. $8.00 Allocated general overhead.... $5.30 An outside supplier has offered to make the part and sell it to the company for $30.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the 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. In addition the space used to make part A42 could be used to make more of one of the company's other products generating an additional segment margin of $23,000 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier? A. Net operating income would decrease by $23,400 per year. B. Net operating income would decrease by $143,400 per year C. Net operating income would increase by $23,000 per year. D. Net operating income would decrease by $189,400 per year. E. None of the above.Explanation / Answer
ans) Option (A) Net operating income would decrease by $23400 per year
Make
Direct materials ( 16000 units X $7.5 per unit) $120,000
Direct labour ( 16000 X 8.9) $142,400
Variable overhead (16000 X 5.5 per unit) 88,000
Supervisor's salary (16000 X 5.6 per unit) 89600
Depreciation of special equipment (not relevent) 0
Allocated general overhead (not avoidable) 0
Opportunity cost 23000
Total relevant costs to make 463000
Total cost to buy (16000 units X 30.4 per unit) 486400
Highest cost to buy (23400)
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