1. Part E43 is used in one of Ran Corporation\'s products. The company\'s Accoun
ID: 2487207 • Letter: 1
Question
1. Part E43 is used in one of Ran Corporation's products. The company's Accounting Department reports the following costs of producing the 12,000 units of the part that are needed every year. Direct materials........$4.50 direct labor.........$1.20 variable overhead..........$2.70 supervisor's salary............$3.00 depreciation of special equipment...........$2.30 allocated general overhead...........$1.80 An outside supplier has offered to make the part and sell it to the company for $14.70 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 $5,000 of these allocated general overhead costs would be avoided. Required: a. Prepare a report that shows the effect on the company's total net operating income of buying part E43 from the supplier rather than continuing to make it inside the company. b. Which alternative should the company choose?
Explanation / Answer
a)Make or Buy decision under incremental approach
b) the company should manufacture the part inside the company.
Per unit Total Make Buy Make Buy purchase price $14.70 $176,400 Direct materials $4.50 $54,000 Direct labour $1.20 $14,400 Variable overheads $2.70 $32,400 supervisor's salary $3.00 $36,000 relavant allocated general overheads $0.416 $5,000 total relevant costs $11.816 $14.70 $141,800 $176,400 net operating income decrease if buying $2.884 $34.600Related Questions
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