#17 At Outsourcing Corporation they are presently making part ABC88354 that is u
ID: 2477160 • Letter: #
Question
#17
At Outsourcing Corporation they are presently making part ABC88354 that is used in one of its products. A total of 9,100 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
$5.55
Direct labor
$2.95
Variable manufacturing overhead
$4.25
Supervisor's salary
$2.35
Depreciation of special equipment
$6.65
Allocated general overhead
$2.95
An outside supplier has offered to make and sell the part to the company for $17.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs 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 ABC88354 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?
a. Net operating income would decline by $17,290 per year.
b. Net operating income would decline by $70,070 per year.
c. Net operating income would increase by $70,070 per year.
d. Net operating income would increase by $17,290 per year.
At Outsourcing Corporation they are presently making part ABC88354 that is used in one of its products. A total of 9,100 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:
Explanation / Answer
Total Cost per units that can be avoided if outsider suppliers is accepted.
A) Direct Materials =$5.55
B) Direct Labor = $2.95
C) Variable manufacturing Overhead =$4.25
D) Supervisor's Salary =$2.35
Total Cost (A+B+C+D) =$15.1
Net operating Income would decline per year = ($17-$15.1)*9,100 =$17,290
So, Option a will be correct
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