1. A specialized part is used in one of our company\'s most popular products. We
ID: 2489477 • Letter: 1
Question
1. A specialized part is used in one of our company's most popular products. We know the following costs of producing the 17,500 units of the part that are needed every year.
Per Unit
Direct materials
$4.90
Direct labor
$5.20
Variable overhead
$3.50
Line supervisor's hourly salary
$8.60
Equipment depreciation
$9.20
Allocated general overhead
$6.00
An outside supplier has offered to make the part and sell it to the company for $32.75 per unit. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The 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 $24,000 of these allocated general overhead costs would be avoided.
a. Prepare a report that shows the effect on the company's total net operating income of buying the part from a supplier rather than continuing to make it inside the company.
1. A specialized part is used in one of our company's most popular products. We know the following costs of producing the 17,500 units of the part that are needed every year.
Per Unit
Direct materials
$4.90
Direct labor
$5.20
Variable overhead
$3.50
Line supervisor's hourly salary
$8.60
Equipment depreciation
$9.20
Allocated general overhead
$6.00
An outside supplier has offered to make the part and sell it to the company for $32.75 per unit. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The 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 $24,000 of these allocated general overhead costs would be avoided.
a. Prepare a report that shows the effect on the company's total net operating income of buying the part from a supplier rather than continuing to make it inside the company.
Explanation / Answer
Answer:
Statemet showing computation of change in operating income Particular Per unit cost of production Cost of production for 17500 units Reason Total buying cost of 17500 units Reason Change in operating income if units purchased from outside supplier Purchase cost of 17500 units = (17500 x 32.75) $ 573,125.00 Variable Cost Direct material $ 4.90 $ 85,750.00 Direct cost relevant Direct Labor $ 5.20 $ 91,000.00 Direct cost relevant Variable Overhead $ 3.50 $ 61,250.00 Direct cost relevant Line supervisor's hourly salary $ 8.60 $ 150,500.00 Direct cost relevant Depreciation on equipment $ - It is sunk cost so not relevant in decesion making It is sunk cost so not relevant in decesion making Allocated overhead $ 6.00 $ 105,000.00 Direct cost relevant (24,000.00) incremental saving in overhead only is important because other overhead cost are sunk cost and so irrelevant (A) $ 493,500.00 (B) $ 549,125.00 (A-B) $ (55,625.00)Related Questions
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