Kerbow Corporation uses part B76 in one of its products. The company\'s Accounti
ID: 2471295 • Letter: K
Question
Kerbow Corporation uses part B76 in one of its products. The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year. An outside supplier has offered to make the part and sell it to the company for $27.40 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. In addition, the space used to produce part B76 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product.
A. Prepare a report that shows the effect on the company's total net operating income of buying part B76 from the supplier rather than continuing to make it inside the company.
B. Identify which alternative the company should choose and explain why.
C. Determine what errors managers may make when considering make or buy decisions and basing the decision solely on the data?
Explanation / Answer
Answer a. Make Buy Direct Material (12000 Units X $7.20) 86,400 Direct Labor (12000 Units X $7.10) 85,200 Variable Overhead (12000 Units X $3.50) 42,000 Supervisor Salary (12000 Units X $4.70) 56,400 Allocated General overhead (Only Avoidable) 6,000 Purchase from outside Supplier (12000 Units X 27.40) 328,800 Oppourtunity Cost - Additional Segment Margin (29,000) Total Cost 276,000 299,800 Effect on Net operating Income (23,800) Answer b. The company should produce the product rather than to purchase it from supplier. It will decrease its net operating income by $23800, if they purchase the product from outside supplier. Answer c. The other factore sto be considered are as follows: 1.Supplier is finacially capable to produce the product and able to supply the product. 2. Supplier can produce the product of same quality of the product. If the quality is not of the assured level, then it will affect the goodwill of the Company. 3. If the sale is increased in futuer the supplier is able to supply the goods to the Kerbow Corporation. 4. If the production of the product is discontinued, then the cost of termination of the employees and other compensation paid should also be considered. 5. The morale or motivational level of the employee will be down, due to closure of the Production production and should be considered.
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